A tale of two commissions.

a tale of two citiesIt was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.

Some of you may recognise this line from ‘A Tale of Two Cities’ by Charles Dickens, however, I am not a classical scholar, instead it sums up my monetary sentiments for 2008. On one hand we are seeing property prices [the very foundation of the majority of Irish wealth] wither away, as global conditions worse, especially in the USA where house prices are now falling quicker than they did during the Great Depression.

There has been more than a few articles in this blog about the current issues in the broker market, the description I would use to describe it at the moment tends to modulate between ‘ugly’ and ‘awful’. Banks have really made great inroads into destroying the intermediary market, first of all they cut commissions, during a time when the market is slowing down, and then they brought in dual pricing, and that is disgraceful because it breaks the accepted norms of practice that have always existed.

scarfaceBrokerage is being forced to find margin where it doesn’t exist, we weren’t making 50% profits so a 50% cut in commissions doesn’t mean that operating profit went from (for instance) 10% to 5% instead it came off the gross, and put any profit into instant negative figures, that’s the financial equivalent of the chainsaw scene from ‘Scarface‘.

The thing that many brokers will not be able for though, is the area of clawbacks that may occur in the future, our ongoing cashflow will be based (if all of the lenders follow suit) on incomes of 0.5% which is minus 50% but clawbacks from banks will come in at the level they were paid at which is 100% (or 1% of the loan amount). This can hit a broker for up to 5 years under the ‘revised’ structures by banks, so in 2013 (assuming we will have found a way to survive on half incomes) a broker can still be faced with clawbacks based on the traditional full income system.

schlieffen plan for financeThat means there is a dilemma on many fronts, and brokerage is facing assault on many fronts and we have no Schlieffen Plan in place. The analogy is fitting because the squeeze in the current market is indeed on two fronts and that’s not
dissimilar to the situation the Germans found themselves in during World War 1 (they devised the plan to deal with a war against Europe and Russia simultaneously) in the case of the mortgage brokers in Ireland we have two fronts as well.

The first is Banks, they have cut commissions, introduced increased levels of clawbacks, and now they are ‘dual pricing’ too. The second front is that of the market, the Irish property market is in decline, the cumulative drop thus far would indicate that we have witnessed a crash but naturally the CSO and anybody else will only be able to give us the actual statistics after the fact, the second front is more palatable for the simple reason that the market has no agenda other than playing out as it will, it doesn’t mean anybody in the property game won’t feel its effect, however, it doesn’t have the intentional manoeuvres embedded in it the way that financial institutions do.

financial crisis like the great depressionWhat to do? I get asked this all the time, and my response was, is, and will be ‘what can you do’? If you are driving down the road and the steering wheel comes off in your hand and nothing works but you are still travelling what do you do? Again, what can you do? Hang in there and trade through the hard times, that’s the only solution. A recession doesn’t kill people (putting aside economical situations that may foment war etc.), it’s just a period of hard times and there will be survivors just as there will be casualties.

Many brokers pegged their business model to a 1% commission system, Irish Mortgage Brokers have a business and cost model that is different than every other broker in town, and perhaps that is why (I am delighted to be able to say this) we might actually see growth in a time of a market that is being chopped up and shrinking, that indeed would be a trend breaking coup on our behalf.

warning of a financial stormPresently every major broker in Dublin has had to lay off staff, we haven’t, and the nice thing about any downside is that it always must have an upside, for brokers this may be that the ones who survive will prosper and hold more market share for longer, it may be a redistribution of market share, or a move to the more efficient systems available. In any case every fall out has an equal and opposite reaction, it was the blow out of the dotcoms that brought about the capacity for cheap broad band, it was the telegraph crash that made telegraphs, and by extension, eventually, telephones, cheap and accessible.

It’s just a case of sitting out the turbulence, until that happens nobody can really tell what the future holds, for now the main issue is to get through to the other side, thankfully we are already 11 months into a crisis that many would be forgiven for thinking only started in 2008, historical information interprets events after the fact, the hard part is to determine the lay of the land when you are in that moment. For now low sentiment prevails.

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