Irish Mortgage Brokers Blog

This post is a brief account of the residential mortgage providers in the Irish mortgage market, a brief look at who they are and what kind of lending they are involved in. Many people have no idea who is who, or who owns who so this should help to clarify some of that. Of course, as a broker we can help guide you through the myriad of lenders and options, but even our expertise is not an adequate replacement

The list of lenders in residential mortgages are (in no particular order)

1. IIB Homeloans
2. Haven
3. PTsb
4. First Active
5. EBS
6. Irish Nationwide
7. ACC Bank
8. Bank of Ireland
9. Springboard
10. Start Mortgages
11. Nua Homeloans
12. GE Money
13. Leeds Building Society
14. Bank of Scotland
15. ICS
16. NIB
17. Ulsterbank
18. AIB

Who they are and what kind of lending do they do?

1. IIB Homeloans: This is ‘Irish Intercontinental Bank’ and they were once owned by Irish Life, they then got bought out by KBC. So who owns IIB now? KBC do, they are a good firm and KBC have had virtually no exposure to sub-prime loans, IIB did have a firm called ‘Stepstone‘ who were a subprime lender but they were closed shortly after starting. IIB are 95% broker channel with a small direct sales side. This means that almost all of their business is placed via brokers. The important thing to realise here is that they have about 12.5% of the residential mortgage market, if you didn’t use a broker you likely didn’t use them because they mostly deal only with broker loans. It re-enforces our belief that you have to talk to a broker to get independent advice.

2. Haven Mortgages: Haven is a broker only channel that is a subsidiary of the EBS, it was launched in 2007 and it is quickly gaining market share, their proposition is not identical to the EBS and access to their loans is exclusively through brokers. Haven is based away from the EBS (it’s located on Amien’s St.) and it operates as a seperate entity. They are quickly proving to be an innovative leader and the additional competition within the market is welcome. Currently however they have been raising their rates because (as is the case with most lenders) of the interbank markets, in addition, they source their money via the EBS so one concern for a broker only channel is whether or not they will be able to remain competitive with the EBS.

3. PTsb/Permanent TSB: This banks was formed when the building society Irish Permanent amalgamated with TSB (Trustee Savings Bank) later this new institution merged with Irish Life to become IL&P (Irish Life & Permanent), so PTsb is the banking wing of the Irish Life group. They are a massive lender who command almost a quarter of the residential mortgage market. They have been aided in their growth by strong support from the intermediary channel upon which they rely heavily. The share price of the Irish Life & Permanent group has been highlighted recently for poor performance but the actual company itself remains a market leader.

4. First Active: This was initially a building society that later got listed as a public company in 1998 and was later bought by RBS (Royal Bank of Scotland) in 2004. First Active had a strong history of home loans and although they have banking and savings facilities their penetration in that market is minimal. Their current host of rates are considered to be amongst the most expensive in the market and they have been the first to re-introduce certain types of mortgage fees.

5. EBS (Educational Building Society): This is Ireland largest building society, having said that building societies are thin on the ground as most have graduated up to fully fledged banks. They have branches and franchises, the franchises look and feel like any other EBS but they are owned by a franchisee. As the EBS is not a bank it doesn’t offer current accounts, but it does have ATM’s via AIB and credit cards via MBNA. Their investments are tied to Irish Life. In 2007 they launched a broker only channel called ‘Haven’. Traditionally EBS were known as a ‘first time buyers’ bank however, they have left that moniker behind and are known

6. Irish Nationwide Building Society: This firm is one of the smaller players on the market, historically their rates are also amongst the highest in the market, for this reason they are often seen as a lender of last resort in the mortgage market. Having said that, Irish Nationwide continue to remain profitable in the market and they seem to have escaped the sub-prime debacle, they also have a range of attractive deposit products.

7. ACC Bank (Agricultural Credit Corporation): Is primarily a commercial bank which focuses on agriculture and SME firms, typically when you wanted to borrow to buy land for farming ACC were the only lender who would look at this, they hold a strong niche in that respect. In 2002 Rabobank bought ACC and they are now a fully owned subsidiary. There are about 40 branches of ACC bank in Ireland, the firms focus going forward is to move into the business banking sector. If RaboBank decide to pursue a residential lending arm to their business then it is likely that ACC will be the conduit for this.

8. Bank of Ireland: BOI shares have taken one of the most severe hits in recent months, formed in 1783 Bank of Ireland is the oldest bank in Ireland. Bank of Ireland offer a full range of financial services, from credit cards to mortgages, they have an extensive branch system and they are a major lender in the residential market and they have exceptional market share in the commercial property section. Bank of Ireland are not generally dealt with via brokers because they never developed that channel fully, instead they worked on developing their subsidiary ICS into a broker channel for the group.

9. Springboard Mortgages: This was a joint venture by Merrill Lynch and PTsb which focuses on specialist or sub-prime loans. The Irish market saw a swath of entrants into the lending market from 2004 including firms such as Fresh (no longer operating) and Stepstone (no longer operating). Springboard is almost exclusively a broker only channel. Merrill Lynch removed themselves from the JV in mid 2008 and Springboard is now a fully owned subsidiary of PTsb. The exact details of the move were not disclosed. Springboard continue to offer specialist loans and they are amongst the remaining four players in the specialist market.

10. Start Mortgages: Despite being the second entrant to the market Start Mortgages actually took the largest market share in Ireland after commencing operations here, at the time they arrived the only lender offering specialist loans was GE. Start were owned by Kensington in the UK and later the group was sold to Investec. Start is an innovative lender and they championed many concepts in the Irish mortgage market, however, as is the case with all lenders, the crunch has resulted in a slowdown in lending levels.

11. Nua Homeloans: This is one of the newest players on the Irish mortgage market and they are also owned by Investec. Investec now have two players in the Irish subprime market so there is a belief among many that we will see either a sale of one of the banks or perhaps a consolidation or rebranding of both firms into one. In the interim Nua are gaining market share, they have embraced an electronic platform which makes dealing with them exceptionally easy, they are amongst the front runners in the Irish market to have achieved this.

12. GE Money: GE were the original sub-prime lender in Ireland, they entered the market back in 2003 with their first proposition. At the time they were basically consolidating ‘near prime’ loans and for this reason they left the niche open which gave Start Mortgages the opportunity they took when they entered the market. GE have since made aggressive inroads into the market on several fronts from mortgages for people with bad debt to personal loans and car finance (they had been in personal loans and finance all along). GE is one of the worlds largest companies and they are active in almost ever facet of business known.

13. Leeds Building Society: Leeds is the newest entrant on the market and they are a British Building Society (7th largest in the UK) and they came to market with a tracker/LTV proposal financing properties with a ‘one size fits all’ tracker for properties of 80% or less LTV. They operate on multiples which limits their ability to lend to many highly geared Irish properties however, their market share was impressive in their first two years of operation and they are a welcome competitor to the market. Their rates are hugely attractive at present as they offer trackers at ECB + 1.45% in a market where everybody else seems to be pushing for margins of 2%.

14. Bank of Scotland Ireland (BOSI): This is a firm that was brought to Ireland by brokers, they introduced tracker mortgages, and in essence it was BOSI who shook the market up, most of the public don’t really think about the fact that BOSI was a broker only bank that introduced Trackers to the Irish market, trackers are the most transparent and best value long term loans available, other banks soon followed suit and copied the BOSI proposal. Recently the firm has had difficulties because their mother company HBOS is having issues, they also started a retail only channel in Ireland Halifax, the move to retail has not proved as successful as they had hoped for and brokerage still accounts for most of their business.

15. ICS (Irish Civil Service) Building Society: This was once a state owned lender exclusively for use by civil servants, it was later sold to Bank of Ireland and it is a wholly owned subsidiary, they distribute mortgages almost exclusively through brokers and they tend to have a product offering that is slightly better (historically) than BOI, their direct sales branches are branded as ‘The Mortgage Store’ however, clients entering their premises can only be offered an ICS loan, on the life front they would be able to broker different products from institutions such as New Ireland or Eagle Star.

16. National Irish Bank (NIB): This is the southern version of ‘Northern Bank’ (of robbery fame). They were bought by Danske Bank in 2004 from National Australia Bank who had bought NIB in 1987. NIB are best known for polar opposite events, on one hand (long ago) they had helped clients open accounts under false names and evade tax, they overcharged customers, their ex-head of financial advice is barred from being a company director. However under Danske they have become known for positive reasons, namely their ‘LTV tracker’ which has been and remains one of the best value loans on the market. Mind you, their variable rate is amongst the worst in the market, but for the client who knows what they want and how to spot value their LTV tracker is unmatched. In a nutshell NIB can’t be touched by any other lender when it comes to trackers, the main gripe brokers have with them is that we can’t place loans with them!

17. Ulsterbank: This bank is owned by RBS and like its sister firm First Active their rates are amongst the most expensive in the market. They had a broker proposition and then in 2008 with minimal notification they informed the market (by email) that they would pursue a ‘branch only’ model, they had a competitive offering from 2004-2006 but since that time their loans have not been popular within the intermediary channel.

18. Allied Irish Bank (AIB): AIB has the largest branch network in the country, only BOI is near them, they are one of the ‘Big Four’ in banking in Ireland. They offer insurances via Ark Life and they are involved in every major facet of banking, from commercial lending to residential. On the residential front their primary distribution is via their branches, AIB do deal with brokers, it used to be via a channel called AIF (Allied Irish Finance & Leasing) but this was merged with the main group in 2005. The bank was only formed in 1966 by the purchase and merger of three other banks. Poland is a large area of AIB’s operations in the new millennium. Their lending policy is considered by many to be ‘profile’ based rather than strictly ‘underwriting’ based, and for that reason they are not the lender of choice for many cases, but for the type of business they do want they are a lender who demonstrates total flexibility and service.

That is a basic run down of the mortgage providers in the Irish market. No broker can really claim to have agencies with ‘all of them’ for residential lending. If you have any questions about this or any of the posts you see here be sure to call us! 01 6790990

We have written in the past about tracker mortgages becoming an endangered species. It seems that now we are witnessing the demise of them, the interbank rates and the ECB have become so disparate to each other that one is no longer an accurate gauge of the other. What does that mean?

The ECB is the rate set by the European Central Bank, and it is the ‘base rate’ (currently 4.25%), but banks can’t generally borrow at that price and instead they buy on the ‘interbank‘ market, this is the largest market in the world in which over 1.9 Trillion is traded every single day! It is how banks access the ‘Euribor‘ market (European interbank offered rate). This is basically run as an auction and because liquidity is an issue we have seen the prices of the Euribor rise and rise, demand is outstripping supply.

Why is the Euribor rising? Simply put, fractional banking means that banks must have a constant inflow of money in order to stay in business, when money is scarce that gives it a higher value or a so called ‘scarcity value‘, anything scarce for which there is a demand will go up in price and that is the basis of what we have seen on the interbank market.

So how does this affect tracker mortgages? Tracker mortgages were marketed in the residential market as (almost exclusively) a loan that would ‘track’ the ECB by a fixed margin, this was as low as 0.45% above ECB with some banks, this mean that if the base rate was 4% your loans interest rate was 4.45%. A brilliant loan for Mr. Consumer and excellent value, and the banks were happy as well because they were able to provide these loans (albeit at low margins) and still find some profit from them.

Then along came the credit crunch, it started to show up in Euribor rates in July of 2007, and since then the old cosy relationship with the ECB is but a distant memory. The Euribor was typically ECB + 0.1 to 0.2%, since the credit crunch it is more like ECB + 1%. So do the maths, lending out at ECB + 0.45% and buying in your ongoing money supply at ECB + 1%. That instantly tells you that the bank is actually supporting lenders by 0.55% on these loans! And this is the case on many loans, on average trackers were sold out at ECB + 1% so although they might not all be making an instant loss on margin they are creating operational loss because banks can’t run their companies for nothing, although at least it’s not as bad as negative margin.

The Sunday Business Post (article by David Clerkin) wrote this week about the ‘End of the Tracker’ and quite rightly it was pointed out that lending at negative margins is a reality for many lenders. PTsb and IIB have stopped offering tracker mortgages altogether while Ulsterbank and First Active have instead used the blunt hammer of rate to control this, their margin is ECB + 2.25% (huge margins on those loans!). It is therefore fair comment to accept that new tracker borrowers with Ulsterbank and First Active are funding the losses being created by the past customers who are on negative margin loans, I guess even in finance the ’sins of the fathers will be visited upon thy sons’. Unfair? Perhaps, but this isn’t about morals, it’s about margins.

Rates in general now with most institutions are hovering around the 6% mark, this is a full 1.75% above the current ECB, and almost 0.8% above the Euribor, so the margin is actually above where it used to be in 2006 yet this is no solace as every lender is still carrying negative margin loans that likely take the goodness out of higher rates over all. In the Irish mortgage market c. 50-70% of home loans are on the variable rate, so the variable rate hikes must have produced a windfall of additional income for lenders as this is all generally happening on the older developed book, however, liquidity is still an issue and that is what drives the interbank prices, you need interbank money for new loans so while they are gaining ground on one hand they are losing it with another.

One thing nobody is looking at is how this all relates to securitized books, you see, when banks start to raise their margins the effect on borrowers is that they can get less, borrowers who get less have to pay less or not buy at all, this means that property prices have to fall to meet the amount they can/will spend, and this in turn means that the equity of properties in general is lower. What does this mean for a bank? Margin call is what it means, as the asset upon which the mortgage is secured reduces in value it means that the bank (back to that fractional reserve concept) must actually become more liquid in order to maintain the loan, when they securitized their debt (i.e. sold their book of mortgages) there are margin requirements the same as there is in a stock holders position when leveraged.

So are we seeing the end of the tracker? Perhaps the real question here is are we seeing the ‘end of the low margin tracker’ and on that point I think it is fair to say ‘yes, we are’.

The ECB (European Central Bank) changed its base rate today to 4.25% which is an increase of 0.25%, the previous base rate of 4% had been left unchanged since its inception in June of 2007.

The move, while not favoured by borrowers, is vital in order to control Eurozone inflation which has been running well above the ‘at or just below 2%’ level that the ECB has intended to adhere to. In the first quarter of the year many commentators were saying that they believed we would see a rate reduction in the summer, this blog on the other hand argued otherwise in articles which were posted in mid March and again in mid April. As recently as May professional commentators (our crew is more along the line of humble observers!) such as Simon Barry from UlsterBank and Austin Hughes in IIB said that they feel rates will remain the same or drop. Perhaps one concern we should have in the Irish economy is that respected professional commentators are misinterpreting events, the danger in that respect is that business decisions are being based on this information and when its wrong the decisions are wrong and that has a knock on effect.

How could this affect you? Joe Public? Well, imagine that you were getting a mortgage and wanted a fixed rate, a lender or broker might say ‘the predictions are that rates are going to come down’ and for that reason they advise not getting a fixed rate because you would potentially be paying more for the loan if you bought a fixed rate right before rates dropped. The precise problem in the Irish market was that lenders have pumped up rates even though the ECB didn’t move their rates, and now that they have, variable rate holders will be getting hit with that increase as well, so it’s a double whammy and that is the price of getting it wrong.

The reason we believed this is that inflation figures were running too high and could not be ignored, that, coupled with agflation and rising oil prices meant that the only way to reign in inflation would be to deliver a rate increase. Inflation by nature is easier to prevent than to try and recall, the US Fed will have some testing times ahead for that very reason.

Lenders here are expected to pass on the rate increase to borrowers. The average mortgage holder may be forgiven for thinking that ‘rates were going up’ all along because every lender had increased their interest rates in 2008. The reason for the lender increases had nothing to do with the ECB base rate, instead it was based on the EURIBOR (European Inter Bank Ordinary Rate) prices which were and still are at historic highs. In a healthy economy the Euribor would generally be

[Base Rate] + 0.1 - 0.2%

A bank would buy money at that price and then lend it on, but since the dawn of the credit crunch and liquidity crisis money is not available and any that is carries a high premium so Euribor rates have been closer to the 5% mark for quite some time despite the 4% base rate, of course, with today’s increase we will see those rates go up by 0.25%. If core inflation comes into check then perhaps this rate increase will be the last in the series of rate increases that we saw beginning in December 2005. The balance and the difficult job of the ECB is to find that balance between inflation and growth, so far they have done a good job but perhaps we will now see the point reached whereby inflation falls off but growth does too.

In order for a rate increase to take effect through the economy it will take at least three months and maybe as long as a year. If the economy does not respond to the 0.25% raise then the ECB would likely be faced with having to consider a further increase, however, in looking at general sentiment - check out the headlines of national papers around the EU - you will see that everybody is tuned into what is happening so we will likely see the 0.25% raise in the base rate have a similar effect to a 0.5% raise for the simple reason that everybody is so focused on the rate market.

The economy is facing a challenging time, yesterday €2 billion was wiped off the ISEQ and meanwhile that oil inflation mentioned earlier made headlines too as the barrell price reached $146. This is raising concerns over employment costs, the ’stagflation’ period of the 1970’s happened in a time where labour prices rose in order to meet the inflationary environment, today it will be vital for labour costs to be kept in check or we may face the very real risk of embedded inflation, further rate increases made to stave off inflation, and then the stagnant or decreasing GDP bringing about that dreaded stagflation environment.

For now we will have to wait and see what the effect is of the ECB rate change and how the EU economies react in the short term.

Sherry FitzGerald said yesterday that property prices fell 4.5% in the second quarter of the year having fallen 1.9% in the first quarter. The results to the 12 months to June showed that prices fell 10.2%. So house prices are moving, albeit down.

The factors that are affecting property are mixed and many, primarily the prices are/were too high, and any time assets receive valuations above and beyond what they merit you will see market corrections. We are also seeing a unique time in banking history, and in many respects the property price correction is not dissimilar to the 1929 crash because both of them focus around leverage, I’ll continue on that point in a later blog about ’similarities in economic history’.

Cheap money from central banks is also on the wane, in fact almost every economy has increased rates in an effort to bring inflation under control, mixed in with the lending liquidity issues we see a two fold effect. First is that there is not as much money to lend, even if borrowers want it, that is a confounding issue when it comes to mortgages because in general money is ‘created‘ when it comes to lending. However, in true economic style there is a high premium on having cash now, so you will see that almost every bank is finally offering decent deposit rates, the reason for this is that they need cash desperately.

However, it is also true that interbank lending is carrying a premium, and that is driving up the cost of funds, the 3 month euribor is at 4.95% today, however, this is being ignored as money is basically ‘auctioned’ off, and for that reason we are seeing banks paying up to c. 6% in order to obtain funds. Financial institutions can’t catch a break in the current climate, and we saw the stock market reflection on this recently with the values of Bank of Ireland, Irish Life & PTsb, and RBS (who own UlsterBank and First Active). RBS have lost 60% off their share price since last year and some commentators are wondering whether or not they will rebound ever.

Recently Ulsterbank and First Active raised their rates to what can almost be considered sub-prime lending prices, this was because when they raised funds (the most recent purchase was said to be €1 billion) they had to pay a very high premium for that money and the only way to lend it successfully is to raise margin to whatever point they have to go in order to create profit.

The hammering banks have taken is naturally having a big effect on the intermediary market, brokers clients are still looking for money but the present issue is that lenders are reigning in criteria at a rapid pace which means that lending is becoming more and more restrictive, in fact, many perfectly sound clients are finding credit lines difficult to obtain simply because of the changing criteria landscape.

If we look at property booms and busts in other countries the pattern (if there is any semblance of a pattern!) seems to be that you can expect a 36 month period of adjustment, that can be a fall out in two months followed by 34 months of little or no movement in prices or it can be 20 months of falling prices with 16 months of stagnation, in any case the cycle tends to take about three years to move out of, in terms of the percentage changes the normal pattern is a drop of about 33% from peak values.

Ireland has seen prices on the way down since late 2006 so it’s acceptable to believe that we are at least 18 months into this cycle already, it doesn’t feel like halfway because the start of it was gentle, however, in recent weeks not many people could say that they are in any doubt about the condition of the economy, the ESRI has stated that we are officially primed for a recession.

A recession is a normal economic cycle, you could look at it almost as an ‘economic rest period’, if you kept running until you literally dropped the fall out would be worse than if you run for a while, take a break and then run again. The problem this time around though is that we were running for a long time, running on easily available cheap credit.

This will be a bitter pill for many who may find themselves in negative equity, however, there is no way to protect buyers, even the hardest hit and most vulnerable from the movements in the wider economy, perhaps we will find a way to avoid this in the future.