Bank cost of funds versus mortgage prices

Eurodollar or LIBOR cost of funds is a common phrase in banking, what does it mean or do though?

Banks borrow short term and lend out long term, they call it ‘maturity transformation’ and in doing so they aim to make a mark up on the money, it’s the same concept that a shop uses in selling cartons of milk, fundamentally the idea is the same.

The LIBOR rate is ‘London interbank offer rate’ and represents the cost of funds for a high quality non-governmental institutional borrower.

To get an idea of the cost of funds (and this is currently speculative because Irish banks don’t get offered funds at Euribor [euro equivalent of Libor]) all you have to do is a simple calculation.

We know that banks tend to use three month money and that means that any calculation will always have the interest rate reduced by multiplying it by 90/360 (3 months = 90 days, and 360 = 1 year [I know that in real life 1 year is 365 days but that small change of 5 days gives …

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Mortgage Mediation, a solution for mortgage holders in Florida (could it work in Ireland?)

Currently about 25% of the mortgages in Florida are delinquent, there is a huge amount of foreclosed property on the market, short sellers can’t offload fast enough, property prices are falling, and it is also a judicial foreclosure market meaning people have similar issues to the problems we have here when a home in negative equity is repossessed, they owe the difference.

A possible solution being tried there is that of mortgage mediation. This is vastly different than the scheme in place in Ireland, and perhaps active mediation with a set point of contact and a set representative would be a good idea, chances are we’ll never know because it is not likely to be rolled out in Ireland.

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Banks have a message for you, ‘Get off my loan book!’

We have been saying for quite some time that banks would start to find ways to induce people away from their loan book. The first mention is from a post here back inn 2008 where we mentioned ‘early redemption bonuses‘  and then we also said something similar which Niall Brady from the Sunday Times picked up on in July of 2009.

The basic premise is that banks want rid of certain types of borrowers and loans in particular, and in some cases loans in general. We’ll take a look at the loans that bother them the most below.

1: Sub-Prime loans: this is definitely the clearing house recently Fresh Mortgages sold their loan book in a private deal believed to be well below 30c on the euro. This was for a book that was secured on sub-prime mortgages and serviced via a centre in Northern Ireland, something Fresh did was to offer their borrowers an inducement to go elsewhere or pay …

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Mortgage Questions: I am not in permanent employment. Can I get a mortgage?

Answer: If you are not in Permanent employment no mainstream mortgage lender will consider a mortgage application from you, while that may sound harsh, it reflects the reality in lending that the main thing a lender needs is security that the borrower has the capacity to pay back the loan in the future. Sub-prime Lender Start Mortgages may consider an application, but if you opt for a specialist lender you will pay  for it via the margin on their lending, they take on risky applications but they charge accordingly. The maximum loan they will lend is 75% of the purchase price. This type of application is assessed on a case by case basis & will depend on the length of your contract served etc. the length of contract remaining and your previous employment history.

However, to give a short concise answer – generally banks won’t lend to you if you are not in permanent employment, this is a question you will be asked by your mortgage adviser and it also appears on your salary cert.

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Failed regulation in the Irish market

There are three broad benefits to regulation of a financial system.

Firstly, avoidance of negative externalities, often the societal costs of these outweighs the private cost and prevention is possible when a regulator is function well and doing their job correctly. They do this by preventing excesses, by promoting conservative risk management in the financial sector and helping to maintain confidence by ensuring (for instance) that a liquidity shortfall in one institution doesn’t spill over into others (i.e. avoiding multiple bank runs which take down well functioning solvent banks in their wake) resulting in a widespread credit crunch.

Secondly, to set solvency and reserve requirements for banks, at times there are significant asymmetries in information within the consumer/institution relationship, or worse still, information gaps (where both institution and consumer don’t have full information – as happened in the sub-prime loan market in the USA), when nobody can determine the quality and reliability of a financial product a strong regulatory environment will ensure that banks are in a position in which they can …

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Why is the bank asking for my marraige licence?

The approach of underwriting in banks is an ever changing beast, sometimes they seem to focus only on payslips and p60’s, at other times its Salary certs and bank accounts for the last six months, recently we have seen a rise in the number of people who are being asked for marriage certificates or ‘marriage licences’.

Initially it seemed a bit odd and then (this is one of the times where you grin realising the world has changed and failed to inform you) we saw that it was always coming up in married couples where the woman hadn’t changed her last name to that of the husbands.

In our office its a 100% change from the old way, none of the women have their husbands names, and of the  married men, none of their spouses took their names (myself included). It seems there is a serious social shift in place with the current generation of people getting married, it would seem that fewer and fewer women are taking the …

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Moving paper or ‘selling your mortgage’.

In the USA and Canada they sometimes refer to a process of ‘moving paper’ which is where a person sells their mortgage – the actual debt and all the conditions that go with it. That might sound kind of pointless but it would certainly be a valuable option in Ireland and could perhaps offer (if it existed: it doesn’t) a selling advantage of debt holders over non-debt holders in selling a property.

Take an example of a person selling a house for €200,000 if they were able to offer their current mortgage of ECB+1% to the prospective buyer then it might be an attractive proposition! In particular, the bank might benefit because even if the person was in negative equity it might be worthwhile to buy such a debt product at a premium.

People don’t think about buying or selling mortgages (institutions do it all the time), and yet we readily consider buying and selling debt (which is what the bond market is). Why can’t we do the same for the individual …

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Irrational banking, non-competition creating profits unexpectedly.

That banking in Ireland is a little irrational at present is a given, however, there are occurrences in the market which will change pricing structures in the near future, interestingly, by trying not to compete for business, several banks will ultimately make the market more profitable for all of the banks, achieving almost the opposite of what they had hoped to do.

I’ll explain, at the moment we have seen widespread Sovereign Credit Retrenchment, that’s a fancy way of saying that banks who are bailed out by certain countries are only really focusing on their indigenous markets because it is those markets that bailed them out. Irish banks have done this, Irish owned UK operations are closed. Equally, UK banks here are doing this by making their existing business rates higher and their new business rates exceptionally high.

Bank of Scotland’s new business variable rate is 6.19%, a whopping 5.19% over the ECB, they are doing this to avoid lending, and they are also paring back LTVs so that you have to have greater equity in the deal to borrow, …

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Hedgefunds, risk, and finding the silver lining of any dark cloud.

Here is a simple question: ‘how do you protect or even augment your portfolio returns when markets are crashing or where there is systemic risk?’ if you have an answer then you can be a little smug because the majority of fund managers, the best and brightest the world of finance has to offer, for the most part didn’t have an answer during the last two years and if they did they didn’t (by and large) act upon it.

The classic definition of a hedgefund is not the ponzi-schemes run by the likes of Bernie Madoff, rather it was a fund that strategically goes long and short to produce positive gains regardless of whether the market goes up or down, that was what Winslow Jones was doing when he started the first hedge fund in 1949, while managed fund managers are happy to post a 20% loss when the averaage is -30% (for instance), hedgefund managers are meant to be able to …

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Understanding why mortgage rates MUST rise.

We have been saying for some time that interest rates on mortgages must rise, you can look at supply and demand, or you can look at the types of products that have ceased to exist such as tracker mortgages (removing fixed margin loan products) and then there is the proliferation of variable LTV products which set the stage for the ability to manipulate margin on more loans. The question is ‘what all of this means’, and the purpose of this post is to explain how deposits, business lending and mortgages are all interconnected parts of the banking system and how margins are set based upon them.

Last week PTsb finally came out and said that they were considering an …

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