How falling interest rates hurt banks during a liquidity crisis

The falling interest rates are heralded by consumers of Irish mortgage companies as a godsend – well, for the clients of the Irish banks who actually pass on the full rate cuts that is! However, at the same time it creates a rate compression which damages the bank and this is what we will consider in this article.

Banks have two sides to the operation roughly speaking, on one side there is the lending function which we are all aware of, mortgages, car loans, personal loans etc. on the other side is the deposit taking function which provides part of the money they lend out. There is of course the interbank market which supplements (and often surpasses) deposit funds for lending, but to keep things simple we will focus on a world where deposits roughly equal lending.

When

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Will Specialist or Sub-Prime lenders be better off?

With the news coming out daily about prime lenders facing higher and higher impairment charges it begs the question of who will do better during a downturn, specialist/sub prime lenders or prime high street banks?

Banks stated that they feel impairments of up to 90 basis points were likely, some have revised this figure higher several times with NIB predicting impairment of upwards of 300 basis points. Sub-prime lenders on the other hand start off with predictions of high impairment and they price and gauge the risk accordingly from the outset. Given that starting point, could it be a case that Irish specialist lenders may come out the other side of the liquidity crisis with an overall book that fares proportionately on margins than other prime lenders?

To answer this question we must first consider margins, with many banks typical margin is from 1% to 1.5% on average, however, with many prime lenders this margin is  lower because of low margin trackers that were a point of heavy competition between …

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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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Best mortgage interest rates for first time buyers

The current market is heavily weighted in favour of the buyer and for that reason we have seen more first time buyers interested in finding out how much they may qualify for, albeit that they may not plan to buy any time soon, many people still seem to be holding out for the ‘market bottom’, and naturally we don’t know when that time is, will be, or was (because it could have been last week, only time will tell), it is only with hindsight that the actual bottom can ever be accurately identified.

Another reason is that there are expected rate cuts coming, the next will be delivered at the 4th of December meeting of the ECB next Thursday. Many potential buyers are thus going to wait to see what kind of drop is delivered, if Trichet indicates that another may be in the pipeline it will have a strange effect of causing the inverse of what monetary policy is intended for.

The question we are getting recently is ‘what …

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How To: Get a better rate from your bank

Banks are not lending as freely as they used to and for many borrowers obtaining credit is harder than ever, the people who already have mortgages are also feeling the pinch as lenders raise the margins on variable rates – which they have every right to do!

Tracker mortgages are now gone from the market and we are left instead with a confounding maze of LTV based Standard Variable Rates. This means you get a rate with no guarantee, set by the bank, and its based on the loan to value of your property. This may leave many feeling that they have no option and if you have a defeatist attitude one could argue that it has been imposed rather than earned!

However, last week a member of our team decided they would do something about the rate they were getting and they called the bank and tried to negotiate a better rate, they were rebuffed several times and eventually they got past the business prevention unit and were …

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Irish Mortgage Brokers: Not the subject of Primetime report.

Primetime did a special last night on a company called MoneyZone who are part of Irish Mortgage Corporation, today I got an email asking if we were the company featured on the show.

No we are not, we have similar names to our competitor IMC but we are a totally different organization and having no connections whatsoever to them.

The show was about ‘sub-prime’ lending and it focused on how IMC dealt with a customer who was an undercover reporter. Brendan Burgess (he runs the popular finance website ask about money and is the former Chairman of the Financial Regulators Consumer Panel) was commenting from the consumer and compliance perspective.

Here are some of the extracts:

IMC Male Broker: “to be honest its all about if the regulator or somebody goes into the bank they say ‘why did you approve them?’and they quite simply go ‘there’s the lodgements, there’s the money going through” the broker then went on to explain …

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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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Why Brokers will prosper and why one reporter is full of ‘Dan White’

Recently banks have been increasing the rates they charge clients and stating that they will (for the near future) concentrate on their existing clients in order to generate income for their shareholders. They have also (in tranches) cut brokers commissions, many opting to for a punishing 50% reduction (not so nice when you are on the receiving end may I add!). So now banks will make a higher margin on the money they lend, and juice the deal even more because now they don’t have to pay brokers as much, and brokers place over half of the residential homeloans in Ireland.

Some lenders have gone so far as to leave the mortgage intermediary market. The papers are touting that ‘Brokerage is an endangered species’, that we will face the same fate as travel agents. I would say that this couldn’t be farther from the truth and in today’s post we will look at the proposition of the direct model versus brokerage and why brokers will not only thrive but they will also increase market share whilst doing so.

Brokers for …

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Why Brokers will prosper and why one reporter is full of 'Dan White'

Recently banks have been increasing the rates they charge clients and stating that they will (for the near future) concentrate on their existing clients in order to generate income for their shareholders. They have also (in tranches) cut brokers commissions, many opting to for a punishing 50% reduction (not so nice when you are on the receiving end may I add!). So now banks will make a higher margin on the money they lend, and juice the deal even more because now they don’t have to pay brokers as much, and brokers place over half of the residential homeloans in Ireland.

Some lenders have gone so far as to leave the mortgage intermediary market. The papers are touting that ‘Brokerage is an endangered species’, that we will face the same fate as travel agents. I would say that this couldn’t be farther from the truth and in today’s post we will look at the proposition of the direct model versus brokerage and why brokers will not only thrive but they will also increase market share whilst doing so.

Brokers for …

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100% Mortgages, how to get a 100% mortgage

100% Mortgages became quite popular in Ireland recently and up until the credit crunch they were proving to be the answer for many young buyers, the reason for requiring a 100% mortgage is normally because a person has been renting and paying off college debt etc. and for that reason they were not able to save up a deposit of 8-10% or more. Given that Irish property prices (at least in Dublin) were – and still are – above c. €350,000 it means you would have to save up the guts of €35,000, no easy feat even if you didn’t have college debt and lived at home.

The issue currently though is that the Irish property market is in a declining phase, so lenders have pulled back for the most part from 100% mortgages for the simple reason that they could be in a situation of inverse equity. When you get a mortgage normally you have at least some stake in the transaction, a down-payment or deposit and that portion ensures that you are committed to the transaction, call it …

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