Lickety split-mortgages: are they really a solution? #splitfail

The calls for ‘more split mortgages’ are commonplace, what is often lacking is a deeper understanding of the flaws inherent. For instance, why was there any outcry at banks charging interest on the warehoused portion? Failure to do so is an effective write-down and cash flow loss.

That isn’t to say banks shouldn’t get both, but don’t dress it up in the flowery language of ‘split mortgages’, instead just say ‘we believe in write downs and cash flow losses’. Take an example where a bank doesn’t charge interest for 25 years on a €100,000 warehoused portion of a mortgage where a total of €300,000 is owed.

Assume a discount rate (we’ll side with ECB being able to do their job [mistake]) of 2%. The present value is = 1/(1+r)^n this is where ‘r’ is the rate and ‘n’ is the compounding periods. The reason for doing this is to give an idea of what the €100,000 would be worth in the future if there was no interest and inflation never went over 2%, the …

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What banking insiders think of what banks are going to do

We got a comment on our site from an ex-banker who heard a radio segment where we were talking about banks and repossessions. We got in touch and asked if we could post his comment as a stand alone entry, he agreed, his thoughts are very interesting and in part might help explain why we have repossession orders without repossessions, eye opening reading…

I listened to your piece on Newstalk this morning (19/08/2013) regarding ‘strategic defaulters’ and I just wanted to congratulate you for highlighting the reality of this issue.

I worked for the former *closed bank* for over 17 years and for a two year period I was it’s Mortgage (Residential) Administration Manager. Although I’m out of banking now I still help former clients with negotiations with various banks.

My experience over the past couple of years, and especially this year, in ‘dealing’ with the banks, foreign and domestic, has exposed some incredibly unethical and unfair practices and on the whole I fear …

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Spin me right round’ – some thoughts on IBF data

In statistics there are two key components, the first is the actual ‘data’ the second is the ‘inference’ or what the data actually means. If you saw that one summer was hotter than the last by collecting daily average temperatures that would have statistical significance, if on the other other hand you saw that July was 56% hotter than January then you’d be stating the obvious and your ‘inference’ would be laughable.

That we can see this when it comes to meteorology is obvious, and almost nobody would take such news as having any significance, but when it happens in finance it can go unchecked although Eamon Quinn at the Wall Street Journal caught the IBF out on their release which is about mortgage lending being ‘56% up this quarter’.

Here’s the actual quote they lead with ‘The latest figures from the IBF/PwC Mortgage Market Profile, published today, show that the number of new mortgages issued in Q2 2013 has increased by 56.1% on the previous quarter.’ And it …

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Talking with a strategic defaulter…

That strategic defaulters do or don’t is just a sideshow about quantifying their numbers, for several years we have been dealing with them on the advisory side of our company. Banks have large legal departments and teams chasing borrowers, and in turn the borrowers will from time to time hire their own professionals as a counterweight to the process, what you are about to read isn’t intended as justification, ethical reasoning or anything else, it’s just an insight into the thoughts of a strategic defaulter, why they did it and what has happened so far.

The person in question is a white collar professional and the director of a relatively well known company, she agreed to speak to us on the basis that we kept her identity private. She has a family home and six investment properties.

Karl: Did you make a concious decision to default on your loans? If so why?

Yes, because the bank were insisting I go on interest and capital repayments on the investment properties and the figures just wouldn’t add up so I chose to …

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Dear Banks, leave me alone… How to speak to them

In the process of negotiating with banks many of our customers feel various things, like intimidation, fear, confusion and anger. In trying to get a lender to give a simple and straight forward response we find that it helps to use a certain language or nomenclature in letters and replies.

The simple truth is that they tend to exert authority if you give them this authority, but if you give them the authority with the express requirement that it forces them to make a painful decision should they act upon it. The letter below is a sample that we have used with a few people who have investment properties and it seems to get a decent result.

Don’t use it until such time as you have filled in your Standard Financial Statement (SFS), the end result you are looking for with a letter like this is to get the lender to accept your rent as full settlement of your account until …

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Four channels, one show, different prices – lending looking up in 2013?

AIB currently have four lending channels, there is AIB direct (their branches), AIB Broker (via the Ballsbridge HQ), EBS (done through branches and administered via the AIB direct system) and finally Haven Mortgages (another broker channel currently still located in the old EBS offices on Burlington Road).

There are four channels all operating off of the same credit pricing and all with different rates! Meaning where you choose to apply will make a big difference, even though under the hood you are getting an identical product. This is a classic example of having a brand name product sold at one price then the ‘own brand’ which is made by the same people as the first one, put into a different package and sold at a different price.

At the moment Haven only lend up to 80% meaning you need a 20% deposit, EBS have gone up to 92% which matches them with AIB (direct and brokerage), so the next rational step is for Haven to go to 92% which we are tipped off will be happening in Q1 of 2013, …

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Banks are lending (while standards tighten)

I often complain that banks are ‘not lending’, they say this isn’t true. The Central Bank then says that lending criteria is tightening (report here). This at first seems to support the first statement, but could it be that they are lending and reining in on underwriting criteria at the same time?

It could be, AIB stated that they wanted to lend €800m this year (that was said at the end of 2011 at an in house conference), they are on track to lend €1,050m which is about 25% higher than previously expected. Bank of Ireland/ICS are saying the same thing, at the same time, the main lenders have jacked up rates and made more conservative estimations of who does or doesn’t get loans.

With the fall out in lending from 06/07′ to now, it means that there are plenty of borrowers of a high quality who are seeking finance, when you raise interest rates the stress-testing gets harder to pass, so that cuts out a lot of borrowers, as …

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