Forensic Underwriting, when is it 'too much'?

Lenders will underwrite loans. That is part of the process, it is a natural and normal occurrence in finance, to underwrite, to ensure that you are researching the proposed deal to the extent that you can be sure that you are not taking a pointless risk, but when is it ‘too much’?

Traditionally an employee would be asked to give several forms of documentation as evidence of their position so that they could be considered for a loan. Normally this would have been a straight forward process, and one that generally works.

However, as of late we are seeing ‘forensic underwriting’ becoming more prevalent. The degree to which a lender wants to delve into a persons situation is rising beyond the traditional norms and in some cases we believe it is going well beyond the call of duty.

Let’s be frank, we need banks, who else will lend money to a stranger to buy an asset? Without banks it would only occur between people who have a lot of money personally …

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Beware of Expert Opinion from Promoters.

Lately we have been witnessing a resurfacing of property promoters in the press after a long period of silence. We want to reassert our advice that people should do their own homework before embarking on a large asset purchase be it property or otherwise.

How can you tell if it makes sense to buy a property? Our suggestion, as a financial firm, is that you talk to a financial adviser, you determine your own circumstances, you look at your own unique situation, and that you don’t base your opinion on what you hear on the radio or TV from people in the property business. The people who are restarting to champion property now are doing so under the banner that ‘it is cheap to buy’, part of the ‘cheap’ is due to exceptionally low interest rates, which invariably will go up some day.

That is not to say ‘don’t buy property‘, far from it, what we are trying to tell people is ‘make prudent decisions’, don’t buy any asset you can’t afford …

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Deflation, the low paid, and expansion of the tax base

Here are some statistics (taken from the SBP) showing that contrary to assertions that the ‘rich don’t pay enough tax’ that in fact they pay more than anybody else. Half of all tax income is paid by the top 6.5% of workers. So about 1/15th contribute 50%. One third of all tax collected comes from the top 2.5% of workers, thus 1/40th are paying 33%. It means that things such as the new 2% levy are merely punishing those who already contribute the most! I wrote about this before when talking about the Laffer Curve and how Ireland may be driving high earners out of its jurisdiction.

Sources have said that the Irish tax base is too dependent on a small number of people, so what would happen if we were to drive them out? The implications are severe.

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Understanding Deposit & Lending Margin relationships

Part of the way you can get a view of a lenders margins is by looking at the deposit margins they offer because deposit margins usually reflect – at least to some degree – lending margins. This is because there are two sides to a balance sheet with any bank, on one hand you have deposits which you attract in order to fund lending so if you have low deposit margins that is probably indicative of having low lending margins (although not always!), however, if you have higher deposit margins it is almost certain that you have high lending margins.

NIB released their results today so we’ll take them as an example as well as Anglo Irish Bank to demonstrate the way that you can read into certain elements of how a bank is run from the outside and also on the type of business they engage in.

For a start you’ll need to know that average margin on a mortgage with many banks is less than 1% and that is from …

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Understanding Deposit & Lending Margin relationships

Part of the way you can get a view of a lenders margins is by looking at the deposit margins they offer because deposit margins usually reflect – at least to some degree – lending margins. This is because there are two sides to a balance sheet with any bank, on one hand you have deposits which you attract in order to fund lending so if you have low deposit margins that is probably indicative of having low lending margins (although not always!), however, if you have higher deposit margins it is almost certain that you have high lending margins.

NIB released their results today so we’ll take them as an example as well as Anglo Irish Bank to demonstrate the way that you can read into certain elements of how a bank is run from the outside and also on the type of business they engage in.

For a start you’ll need to know that average margin on a mortgage with many banks is less than 1% and that is from …

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Generic overview of the market 2009: by sector

I was asked by a colleague in the UK to provide an overview of the Irish mortgage market, he has often advised the Bank of England in the past on the UK buy to let market, however this time it is in relation to a talk he was due to give to an international financial services group on the Irish economy. Below are the contents of my correspondence which is a no holds barred view of the mortgage market in 2009.

Remortgage: This area is finally starting to see some life again, the rate drops are filtering through and many of the people on fixed rates taken out in 2005/2006/2007  are shopping around, as always new business attracts better rates than existing customers so there is once again an argument for switching.

However, the many people who took out trackers are basically out of the market in the long term as every single lender has removed tracker mortgages from the market, in fact, if you know of a lender willing …

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Bill Gross of Pimco talks about the deficit in the USA

Bill Gross, known as ‘Mr. Bond’ runs the largest bond fund in the world, in this video he talks about many of the issues facing the economy under the new Obama presidency. Bill Gross is a fascinating character who started his careers as a professional gambler I always enjoy listening to his views on the market which he does with an intersting mix of macro/micro/common sense views.

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