Bank margins after NAMA

The current debate is raging over NAMA and the pricing of loans, much of it centres on the value of the properties in question and about the way in which a ‘loan’ is valued (as opposed to the underlying asset). This makes for good headlines, but it doesn’t help the average person who is not shaping policy and who’s sole role in this mess will be to carry the can and pay their part in the tax pool which will ultimately fund the bailout.

However, you may be affected in other ways, and these are things which you have the choice of opting out of, namely that of the margin you are paying if you currently have any debt/credit outstanding.

Once NAMA comes in it will be extremely likely that banks increase their margins, it is important to consider the ‘why’ as much as the ‘when’ though so we’ll take a look at those.

Why?

PTsb lead the way on this, because they are not getting NAMA protection they have no need to worry …

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Track that Yield Curve! ECB effects.

Today the FT has reported that the ECB will offer unlimited 12 mth repo facilities to banks, this is a big step for the generally hawkish bank. Note: Unlimited.

We have said on this blog/radio/national papers that the 1% mark is not likely to be passed due to the compression it causes on banking profits (the ZIRP policy was one of the inherent issues with Japan’s lost decade). So the opportunity to get in at what is being touted as the historic low, not to be repeated, will have an effect and the belief – at least in this house – is that it will be on the right hand side of the yield curve.

Undoubtedly banks will now gather every available piece of collateral and cash it in. Remember you heard it hear first: this will cause a problem in about 12 months time when the piper has to be paid and everybody is cashing out/back in …

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European stimulus plans

The ECB meeting is due to meet this week on the 7th and a further 0.25% rate cut is expected which will bring European base rate lending to 1% which is the lowest it will go according to guidance given in the past by Jean Claude Trichet. For mortgage holders this will be a further advantage for those on tracker mortgages and for those who hold variable rates where the cut is passed on.

The question currently is whether or not there will be any stimulus packages mentioned or any idea on what to expect in the coming months, with very concise plans afoot in the US, UK, China, and elsewhere it is likely that the Eurozone will need to make some formal plan as well and move beyond the monetary options of only playing with interest rates.

The EU has a problem other currency zones don’t, that of political cohesion, the USA is all dollar denominated and all under one flag, the UK is the same, as is Japan, …

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The pincer of fixed rates while in negative equity

A recent article in the Independent stated that ‘fixed rate borrowers are taking all the pain’. The base rate has fallen from 4.25% to 1.25% with a further rate reduction expectation taking the EU to a base of 1%. What this means is that people who felt the drop off in base rates (tracker mortgage holders & most variable rate holders) are now better off to the tune of about €425 per month.

However, for those on fixed rates the story is the reverse of this, they have not felt any reduction in the amounts they are spending monthly while at the same time many have had to live on less due to wage cuts, levies, and job loss. The fees for ‘breaking’ a fixed rate are usually from 3 to 6 months of payments.

So what can you do? If you have the savings to pay for the move you can go that route, but if you have been …

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The Criteria Crunch

We have just been informed that one the lenders we deal with are only getting through applications received by the 4th of March, that is a near 20 day delay on new applications they are considering. Why the backlog? Has the market suddenly recovered? Are they being flooded?

No, rather it is a case that in banks nearly everybody has been enlisted to work in ‘collections’ and the staff were taken from every other department, in particular the ‘new business’ section. The bank we are talking about today merged their direct channel with brokerage so even going via a branch makes no difference, the whole company has only four working underwriters.

So inasmuch as the credit explosion saw too many resources being thrown at lending and the expansion of same, the crunch is doing the exact opposite by overshooting the mark in the reduction of resources. For a publicly quoted bank to be 20 days behind means that the market is facing yet another hurdle in reaching its rational level. Lending hasn’t frozen, people are …

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Valuations in property are currently meaningless

Free markets, or indeed markets in general, have a tendency to set prices, not through control, not by one person holding up a placard and shouting from the rooftops, but rather through the process of prices reaching a point at where they occur, where demand and supply are reacting with each other.

So if you look for €3 million for a three bed semi in Donnycarney your property will not sell, no matter how much you want it to. At the same time, if you were to list a property there for €50,000 it would sell overnight, and both of these extremes demonstrate a pricing being totally out of balance with the market. The interesting point now though is this: The market itself doesn’t know what is happening, so valuations are currently meaningless. By that I mean the people who go out and value property are not able to make accurate assumptions about property prices in this market, we are seeing this daily, and then dealing with the end result which is …

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ECB cuts rates to 2.5% – tracker mortgage interest rates benefit.

Tracker mortgages are a mortgage that is tied to some form of base, be it the ECB base rate or the Euribor, in residential lending it tends to be the ECB in commercial it tends to be the Euribor. Today interest rates were reduced by a further 0.75% giving a new base rate of 2.5%, which is the lowest it has been since March of 2006,the Euribor is now at 3.743% and will see the base rate drop filter through in the coming days.

Commercial loans tend to follow the Euribor, specifically the 3 month money which banks actually tend to use to finance most of their operations. The way that banks operate is to sell long term but finance short term. This is where they create their margin and its based on the yield curve, part of the problem in the last 12 months was a yield curve inversion which made lending difficult and was a …

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The end of Commissions?

The FSA (Financial Services Authority) in the UK have said that they are not ruling out a future ban on commissions. In the UK financial advisers work on both fees and commissions, however, there is no mention of how they would hope to balance the competition between broker and direct channels.

Currently there are many consumers who cannot afford fees, in Ireland financial advisers work (in general) without fees, relying on commissions for their incomes.  In Ireland consumers have gotten used to a market where they don’t pay brokers, they enjoy independent advice at no difference in cost to that of going through a direct channel (i.e.: walking into a bank where they cannot give you independent advice).

However, if, in the morning the Financial Regulator followed the lead of the FSA and tried to end commissions it would cause a huge market distortion because peoples attitudes to fees would actually drive them out of …

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Where property prices are going vs where they are

There are strong signals we will be getting a rate cut and historically that means that property prices will go up in response to a monetarist move. However, in Ireland this will not cause short term stabilization due to over supply. Today we will look at some of the ECB likelihoods as well as the response that property may have as the rates change.

Historically the boom in property in Ireland only truly gathered pace when rates were artificially low, that happened when the base rate was dropped to 2% for almost three years between 2003 until late 2005. The supply of money increases when you lower rates and the corresponding effect is that asset prices will rise as a result of it, however, there are other times when monetary policy acts as a life-ring more than as a rocket pack and that is the expected result of the Read More →

Will we get a rate reduction? Not if the ECB does it's job we won't.

I have seen articles in the news and economists from large lending institutions are saying they believe we will see two rate reductions in 2008. There are various reasons being put forward for this, and personally I would be delighted to see this happen, however, the flip-side is that if the ECB drop rates then to a degree they will just undermine their own credibility. Why? Because the ECB are not there to save the market just because there is a credit crisis, they were willing to inject liquidity in order to ensure that credit kept flowing, but in the area of Base Rates their only tenet is to control inflation at ‘near or just below 2%‘.

Rate reductions are inflationary, more money starts to move about the economy and there is an upward movement on prices, at the moment inflation is already above the stated target so cutting rates would only exacerbate that, if we get a …

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