I wrote an article back at the end of 2005 called ‘the changing face of the mortgage market’ and I sent it off to a few newspapers and several magazines, it went largely un-noticed, when I say ‘largely’ I actually mean ‘totally’. Apparently I was ranting lunacy or something close to it, if you know me you’ll also know that this was a possibility….
Last weekend in a smokey Krakow it was mentioned during a conversation that you need to make a call on things and then fall on your face when you are wrong but remain vindicated when you are right. In the spirit of that conversation (with thanks to our own resident Enda Munnelly) I will list the predictions I had and then we can either collectively laugh at me or not. The main thing is that I put my predictions on the line and show whether or not I can walk the walk.
1. More than 100%!
Traditionally there were two things stopping people from getting a mortgage, the first was qualifying for the loan, the second was raising the deposit. Most lenders now assess loans on ‘net income calculations’ and certainly people have greater borrowing capacity than ever before so that’s the first hurdle out of the way. That leaves the deposit, short of saving your communion money many people get parental help or in some cases borrow for the deposit. This was part of the rationale of the 100% mortgage.
However, once you have your home you still need to kit it out, and this is precisely why mortgages of greater than 100% are somewhat inevitable. Lenders surely know that once a property closes that a high percentage of people take out personal loans in order to fund the kit out [especially those of us who paid stamp duty!]. Firstly, if they offer that advance it means more profit for them, and it also builds closer relationships with the client [with deregulation of changing accounts this is going to be a big focus for the banks!]. Likely the amount above 100% will be at a rate higher than the mortgage because it is not funds secured on the property, however it would probably be less than standard ‘personal loan’ rates.
This concept has been in the U.S.A. for some time and they are called ‘wrap around’ loans, they also exist in the U.K. It could be argued that this represents increased risk to the lender but if the client is going to borrow anyway then why miss out on an opportunity to help and to make money? You won’t hear a shareholder complain about the latter!
Result: laugh at me, hurl your cruel words…lenders did continue with the 100% mortgages and indeed people are still taking out personal loans within hours of closing on their first house but the banks never went the extra mile. If this is the tone of what is to follow I think I’ll focus my energies on winning egg & spoon races or something.
Humiliation: 2 out of 10.
2. Increase in Sub-Prime market
With all this credit floating around and the Irish consumer owing c. € 2 for every €1 earned it is only a matter of time before some people fall behind in their repayments. The rising cost of living, a shortfall of basic real life financial knowledge in our education system and things like soaring house prices and associated costs create a foundation for this. Sub-prime lending means [quite literally] ‘below prime’ and is usually used when describing a persons credit when they have arrears on their mortgage, car/personal loans, or revoked credit cards etc.
A person’s credit bureau is an active file where all lenders share information. Credit unions have said they are joining [although most have not] and even your credit card balance shows up depending on who issues the card. So full visibility of your credit is the click of a button away and it stays active for six years. If you have arrears many lenders see the lending as an increased risk, and on that basis won’t lend money. However some lenders specialize in this area, currently in the market there are two who operate in the Irish market and its only a matter of time before more enter.
Sub-prime lenders are seen as a lender of last resort because the rates they charge [and in most cases an arrangement fee] are higher than the prime lenders, some people see this as being ‘rip off’ in nature but if you are going to lend money to people who have proven they didn’t meet there obligations in the past then there’s not much of an argument against the practice! Before considering this type of loan speak to your financial advisor and get all the costs and terms of the loan.
Most people will try to finance away from these lenders as soon as possible so keep this in mind if you are opting for a fixed rate with a sub-prime lender as the break away penalty may be high.
[check your own, go to: http://oasis.gov.ie/personal_finance/irish_credit_bureau.html it costs €6]
Result: Bow before the prophet, I stand totally vindicated. The sub-prime market experienced a massive boon in 2007 despite the debacle happening in the USA, and the 2006 figures came in at over a billion in lending. If you wish to genuflect this would be a good time to do it.
Humiliation: Too pious and basking in my own self worth to notice.
3. More complex credit scoring (where its no longer good or bad but ranked) & products linked to this scoring based on points (less points the stronger you are)
Currently there are two types of credit, its either good or bad. This doesn’t take into account the difference between really good credit and just ‘good’. Lenders like to have as many ‘really good’ clients as possible and in the mortgage market they do this by offering [for instance] good tracker rates to people with low loan to values, which is great if you bought your house many years ago, but for those who didn’t it excludes them. The typical mortgage is only lasting 5-7 years presently, this is finance that is typically taken out over 30 years so how many people must be changing their mortgage in year 2 or 3 if the average is 5-7 years?
Typically people are changing for better rates, so a more complex credit scoring would allow banks to tailor products more specifically to a client, for instance if the scoring was 1 to 100 [1 being the best (ie: lowest risk)] you could have a base rate of lending of 2.5% plus your credit score, the margin would be low for those with great credit but they also would not be moving their mortgage away any time soon and they would have virtually no arrears so it would still be profitable in the long run.
The higher your score is the more acceleration on the rate – eg: 1-30 is literally 2.51 – 2.8% then a 20% accelerator for 30-60 would mean that a score of 50 {+20%} gives a rate of 3.1%. a score of 60 would be [60 + 20% = .72 on top of 2.5 = 3.22%]. Offerings tailor made based on this and an increased ability to retain good clients would be the advantage to the banks, but increased savings, and further bargaining power based on your score would also empower the consumer. This is obviously illustrative and not based on any hard fact but if the trends from abroad find their way here it would certainly be something to expect in the future.
Result: I have returned to ground zero with a bang, the harsh realities of my own stupidity are ringing loudly in my ears.
not only was there no reform in the credit scoring arena, but there was not even a hint that it might some day happen. Oh foolish wasted youth, what have I done with my years? ….
Humiliation: back up to 2/10
4. More people turning to brokers.
As a broker I hold this near and dear to my heart, and the demise of the bank manager is by no means near, but for the educated buyer or investor a broker offers a greater set of options than a single bank indeed they can often place the loan with your own bank if they happen to be the best choice for you. With increased visibility [for every transaction you should receive a ‘terms of business’ letter which states how much the broker will earn from the transaction and if there is a fee and depending on the product a commission income illustration] and regulation any fears of using a broker are more perceived than real, indeed most banks don’t tell you what they earn from your mortgage!
Use a broker that has at least five lending agencies or more if you want to access the majority of the market, ask them if they have their mortgage diploma, QFA, or any other qualifications. The increasing complexity of the market, the types of mortgages, the selection of rates and the equal rise in the professionalism of the broker channel ensure that this will be the choice of the future, this trend is already reflected in more mature broker markets in the U.S.A., the U.K. and Australia.
Result: I have returned to the clouds and gaze upon the mere mortals of the world with distaste.
Humiliation: a negative -4/10 the broker channel grew by 5% this year!
5. More lenders entering the Market
Another lender is already in advanced stages of entering the market for early 2006 , a U.K. based sub prime lender came in last year, and one city broker is in talks with two lenders about becoming their exclusive distribution channel for the Irish Market. In the U.K. there are c. 65 lenders in the market which is the most competitive mortgage market in the world, many are turning their eyes to Ireland as an option for distribution, they may arrive selling on price but more likely on product [remember Bank of Scotland offering interest only for the whole term when they arrived?], perhaps ‘offset’ mortgages which don’t exist here yet, self certification, or high street foreign currency mortgages [imagine borrowing in yen with a base rate of 0%!]. This could be a first step in creating brand awareness before developing a further banking channel, this section of the market is definitely set for increased competition. It is still a case that certain lenders have a disproportionate share of the market and any forward thinking lender entering Ireland with a good competitive stance could really make their mark.
Result: 6 new lenders entered the market since then, I should get paid for doing this kind of thing, yes, I am actually that damn good. Of special note thus far is that Vincent Brown never wrote back to me, nor did the Sunday Business Post. Knowing now that I have brains to burn I’ll remain satisfied with blogging.
Humiliation: – 6/10. Damn its great to be me, I could almost walk down the street naked at this point on a cold day after a dip in the liffey and still feel like the man!
The rest of the story will follow soon there were 15 Predictions in total. The only important thing we need to know come the end of part one
is that I am an economic God. However, this may all change fairly darn soon.
karl deeter.