Homeloan carry trade, profit from your mortgage?

‘Carry trade’ is where you borrow and pay interest in order to buy something else that pays higher interest, the difference (when it is working as planned) is called ‘positive carry’. Usually this is done in bonds or currency, for instance, if you were to borrow money on short term rates to finance longer term bonds. The interest being paid on the long term bonds minus the interest on the short term borrowing would be the ‘carry return’. In currency the Yen was a very popular carry trade currency as their interest rate was 0%. So you could borrow in Yen, buy something else (unfortunately this money often ended up in CDO’s) such as US Tnotes and keep the difference, the main risk being that one that the Yen would strengthen significantly meaning you couldn’t pay back the original loan.

How does this affect mortgages though?

NOTE: THIS IS NOT A SUGGESTION THAT YOU DO WHAT IS DESCRIBED HERE! THIS IS MERELY MAKING A POINT!

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The secondary insurance market 'settlements'

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

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The secondary insurance market ‘settlements’

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

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First Active set to close.

It was announced yesterday that First Active is going to close operations in Ireland. This will start with 750 job losses coming into effect via voluntary redundancies, 550 of which will be in the Republic. Unions in Ulsterbank/First Active have said that bank workers are ‘scapegoats’, we spoke about the coming job losses in April of 2008 here.

RBS have made record losses, this lead to their bailout by the UK government. On the ground here it means that at 45 locations First Active will merge with Ulsterbank branches. The removal of First Active from the market will mean there is less competition in Irish lending, this will set the basis for increased margins on lending – at a time when the ECB is dropping rates. Having said that, First Active and Ulsterbank prices are amongst the most expensive in the market with variable rates of over 6% when market leading rates are under 4%.

In …

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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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What next lenders?

Here are some ideas about where we feel banks will go next in terms of the lending market, these are only opinions, whether or not we see any of this coming to fruition can only be told by time.

1. Early Redemption Bonus: Early redemption means ‘paying off your mortgage early’, in fact when you switch your loan this is what happens, or when you clear it entirely. Why would a bank offer you a cash bonus for actually moving your loan away from them though? Or for paying it off? Isn’t the idea that you pay lots of interest?

Actually that’s a mixed answer, normally it would be ‘yes’, banks want you to keep paying interest over time, but now we are seeing a few things that we have not seen before. Firstly are negative margin loans, if you have a tracker of anything less than ECB + 1.5% (ish) then the likelihood is that the bank is not making any money on your loan after their operational cost, therefore it may be worthwhile to give you a monetary …

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House prices are on the move!

Sherry FitzGerald said yesterday that property prices fell 4.5% in the second quarter of the year having fallen 1.9% in the first quarter. The results to the 12 months to June showed that prices fell 10.2%. So house prices are moving, albeit down.

The factors that are affecting property are mixed and many, primarily the prices are/were too high, and any time assets receive valuations above and beyond what they merit you will see market corrections. We are also seeing a unique time in banking history, and in many respects the property price correction is not dissimilar to the 1929 crash because both of them focus around leverage, I’ll continue on that point in a later blog about ‘similarities in economic history’.

Cheap money from central banks is also on the wane, in fact almost every economy has increased rates in an effort to bring inflation under control, mixed in with the lending liquidity issues we see a two fold effect. First is that there is not as much money to lend, even …

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A tale of two commissions.

It 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 …

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First Time Buyers can’t catch a break

First time buyers are being told ‘now is the time to buy’ in the papers. I think it’s time to spell out a few home truths for the prospective buyer just so that they are 100% sure of what they are getting into. Buying a home is fundamentally a good thing, doing so without knowing the facts however is not.

Firstly, property is in a downward market at the moment, that’s not opinion, its a fact. You can dress it up as a ‘re-adjustment’ a ‘balancing out’ or an ‘inter-cusp reductionary period’, heck, call it ‘my granny’ for all I care, it’s still down, plain and simple. So if you put an offer on a property and an Estate Agent tells you ‘you have to sign soon or you’ll lose the place!’, then lose it (unless they accepted an offer so low you have to snap at it!) no guilt, no apologies, and don’t you dare pay full asking price! The current Irish property market favours the buyer not the seller. I would even advise our clients to offer below …

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