Reasons Behind Increasing Interest Rates

Increasing interest rates are a constant source of concern for borrowers. The fact that another ECB interest hike is almost imminent some time this autumn is news that will not be received well by borrowers and will undoubtedly leave countless people in financial trouble. Yet despite this, there is still reasonable cause for central banks to consider raising interest rates.

Output is still continuing to grow at surprising levels. Although this does not necessarily herald the arrival of huge inflationary pressures anytime in the near future, the ECB will certainly wish to curb any potentially adverse inflationary effects and it is well known that prevention is better than cure. Monetary expansion is continuing at healthy levels but a closer look hints that much of this could be resulting from inflows of money that attempt to take advantage of promising interest rates. Mortgage lending is also leveling off agreeably, while wage pressures have not yet surfaced. However, if output levels remain constant, it is likely that this situation could change soon.

Economists are suggesting that the optimal rate of interest …

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How the US Subprime Mortgage Crisis Affects Irish Markets

Rumours have been circulating about the brewing subprime mortgage crisis for the past 18 months or so. More recently we have seen these rumours explode into major headlines as the global effects of the fallout from the US subprime mortgage predicament are felt. Although we should all by now be familiar with the term ‘subprime mortgage lender’, not all of us know what these lenders are. Even more so, many of us fail to see how problems with relating to US subprime mortgage lenders affect global markets.

Subprime lenders traditionally operate outside general ‘prime’ lending conventions. They provide credit to individuals with bad credit ratings, few assets and low incomes. In the US, there have been instances of lending institutions selling ‘Ninja’ mortgages – meaning to people with no income, no job and no assets. Many also allow mortgage applicants to self-certify, in that they personally certify their own level of earnings. In return for this, they charge interest at a much higher level than prime lenders. These lenders then put the loans into bundles and sell off the …

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Fixed Rate Mortgages Offer Greater Borrowing Possibilities

Many borrowers are unaware that it is often possible to borrow larger amounts if you agree to a 5 year fixed rate with your lender. This is because lending institutions are not required to stress test borrowers’ repayment capacity is they decide to take out a mortgage on a 5 year fixed rate.

Under guidelines as set out by the Financial Regulator, when processing applications for variable rate mortgages, lending institutions are required to test the borrower’s repayment ability in face of an increase in interest rates of 200 basis points. This means that if a borrower wishes to take out a variable rate mortgage at a rate of 4.75%, then their application will be stress tested to ascertain whether the borrower could cope with repayments at a level of 6.75%.

Many borrowers choose to buy properties that already require them to stretch their income. This process of ‘stress testing’ applications often means that many borrowers are refused the amounts they wish to borrow on the basis that they would not be capable of making repayments at a …

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Bond Issues, Monoline Insurers and the Fallout from the US Subprime Mortgage Crisis

With the current crisis in the US subprime-mortgage market, observers are keen to speculate on who will be most affected by the fallout. Many onlookers are claiming that one of the industries that will suffer most adversely will be the so-called monoline insurers. These insurers guarantee efficiency in repayment of bond principal and interest when defaults occur. Monolines are highly geared in comparison with conventional insurers therefore leaving them more exposed in an unstable environment. Despite this, Monolines stress test each and every potential transaction under hugely stressful situations and accept only those transactions displaying no losses. This is one of their more conservative protection measures and they do this to cover themselves in the case of things turning bad.

It has been claimed already this year that MBIA, one of the largest monoline insurers in the US, has suffered losses and that it has made large payments in order to quell allegations of instability. One of the major factors considered by observers is that MBIA’s huge leverage. Outstanding guarantees currently stand at 150 times capital.

In the …

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Credit Market Anxieties May Weaken the Global Economy

For a number of years borrowers have been allowed unrestrained movement in the debt markets. This was largely due to huge demand from investors for high-yield products. The healthy profits and favourable market conditions helped companies to make their repayments and as a result, failure to pay was hardly an issue. This resulted in borrowers amounting huge pressure on banks to drop certain precautionary measures that they had adopted to protect themselves in the event of payment defaults.

At present however, investors are being very selective with their choice of investments. Lending institutions that had previously lent substantial amounts to finance huge deals, had done so on the premise of selling these loans on. A decrease in market demand has this week resulted in companies backtracking on two major deals due to close. Deals totaling $17 billion have been withdrawn in the past six weeks alone.

Many are citing the difficulties in the US subprime mortgage market as the principal cause of this change in behaviour. Here, defaults have increased vastly and have resulted in the downfall of …

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US Subprime Crisis Has Far-Reaching Effects

It has been said that when the US sneezes, Europe catches a cold. The subprime mortgage crisis has now reached out to European markets and in particular, to Germany. Recently, we have seen two German banks including Commerzbank AG reporting losses of over $100 million this year alone. Britain’s HSBC holdings, which is the world’s largest bank, made substantial purchases of US subprime subsidiaries a few years ago and as a result, has seen huge losses on the back of the current subprime crisis.

Another issue of concern to investors is that the subprime chaos is also affecting US real estate investment trusts, or REITS as they are more commonly known. Data shows that following the six year continuous growth trends adhered to by REITs , they took a 15% plunge early this year. This has had the knock-on effect of dragging European REITs down with them, bringing grave news for European investors.

It is still thought that this will ultimately encourage good deals to the surface, particularly in European financial services stocks. Many are confident that REITs …

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European Central Bank Injects Billions into Eurozone Banking System

The European Central Bank (ECB) commenced a three day tender process to inject cash into the stricken Eurozone banking system. In what it describes as a “fine tuning operation”, the ECB attempts to bring some form of stability to banks, following the unfavourable effects caused by the fallout from the US subprime mortgage crisis on credit markets worldwide.

This emergency funding amounts to €61.05 billion, a follow-up to Thursday’s injection of €94.8 billion. Liquidity problems have prompted these drastic moves, with fears that that markets were on the verge of drying up, and restricting short term funds for banks. Thursday’s injection figure surpassed all others in the history of the ECB, even greater than the €69 billion sum made available to banks the day after the September 11th terrorist attacks in 2001.

The US Federal Reserve has also granted $24 billion to US markets, in the hopes of offering a more secure environment to banking institutions.

However European stock markets continued to drop, with much of the deterioration in the banking sector. Commerzbank has fallen by 4.7% and …

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100% Mortgages

Ever since its introduction to the Irish market back in July 2005, the 100% mortgage has had to endure much criticism and has been under constant scrutiny. Prior to July 2005, lending institutions required that mortgage applicants have at least 8% of the purchase price of the property, as 92% was the maximum amount they were willing to lend. This was done so that in the eventuality of depreciation, the loan would not be likely to exceed the equity held by the borrower.

This resulted in many people using unsecured lending (credit cards, personal loans etc.) in order to raise the deposit amount on properties. As a result of this, lending institutions felt obliged to review their stances and subsequently brought the 100% mortgage to the market. Many commentators were sure that this mortgage package would single-handedly destabilise the property market. Its real impact was not as great as was expected however, as the terms and conditions laid out by lenders are usually quite strict and the mortgage is only available to FTBs.

The 100% mortgage had been …

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Fall off in Residential mortgage borrowing, precursor to a property crash?

Latest figures from the Central Bank show that residential mortgage borrowing in the first half of the year has slowed by up to 25%, compared with the previous year. Residential mortgages increased by €8.6 billion in the 6 month period to June, which is over 25% lower than for the same period in 2006. This is indicative of the dampened confidence of potential buyers and displays their current reluctance to engage in capital investment. Many investors are wary about taking on loans such as mortgages, given the relative uncertainty of the current climate. In total, the monthly increase in mortgage borrowing (inclusive of securitisations) grew by over €1.6 billion.

There was a considerable increase in the level of outstanding private sector credit in the period Jan-June. This brought the annual rate of increase in private sector credit to just over 20%. There are numerous components affecting this. Residential mortgage lending (not inclusive of securitisations) was seen to increase by €307 million. Term loans increased on average by €2.7 billion. Loans taken out for periods up to and including one …

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House prices 2007, Current Housing Market Summary

It has been well documented that house prices deflated somewhat in the first half of 2007. The thriving rental market is being driven primarily by the large influx of Eastern European workers to Ireland, since EU expansion. However, these demographic factors may not have the same positive effects on the housing market. The large majority of these workers are on the lower end of the wage scale. As a result of this, they may not be in a position to afford to purchase housing here, with the average asking price for a property in Ireland reportedly at just over €370,000. It is thought that a basic estimate of the average amount that consumers can afford to spend on property today is in the region of €380,000 – €400,000, which stands above the current average asking price of a house. Most of these workers are working in the greater Dublin area where the average price of a 3 bed unit stands at approximately €501,500. These workers are consequently being kept within the constraints of the rental market, having been priced out …

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