Why a bank might not bother passing on a rate cute.

Banks have been at the epicentre of the financial crisis gripping the world in 2008. The thing that must be understood is that the formation of the leverage (and subsequent deleveraging which is causing the absence of liquidity) took a long time to form and therefore we will not expunge the problems from the monetary system as fast as many may hope.

So it comes as no surprise that several banks are not passing on the ECB rate cuts. It is important watch the language they use in their press releases things such as ‘We are pleased to announce that we will pass on the full rate cut to our existing clients’ should be read as ‘If you have a mortgage with us already you will get the rate cut, but all the new mortgages, or applications in process will not get the same deal’.

Why would a bank not do the same for new clients? On one hand …

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The shape of reduced credit in Ireland

The current market is one in which mortgage lending rose at it’s lowest rate since the mid 80’s, this is coupled with a property market which is going through a painful readjustment. The figures for how many properties remain unsold are being argued in the public domain with counts from as low as 35,000 to as high as 200,000.

There is no precise and accepted accurate figure and thus the supply side remains unknown, the other issue affecting the market is the reduced availability of credit on certain types of property (apartments in particular) and a more stringent underwriting process as well as a re-assignment of staff away from commercially gaining activity into collections and arrears departments.

What can we expect to see from lenders in the near future? We will discuss some of the possible trends that may start to come into the market.

1. Lenders introducing fees: This is not a ‘fee’ in the traditional sense, such as ‘account fees’ this is a fee paid to them as an …

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How bank margins are likely to be set in the future

We have seen the rise of the ECB (European Central Bank) over the last three years and the possibility of more is never far from the mind of the ECB. The current cost of mortgages however, is not solely tied to the prices set by the ECB, instead it is down to banks piling on lending margin [that makes loans more expensive to the consumer but more profitable to the bank].

It is important to think about this when you think about where your money is going to be going in the future, margins have widened from about 0.5% or there abouts to more than 2% in many cases meaning that there is a 1.5% uplift in the actual mark up the bank is charging, that translates into an extra €375 per month on a mortgage of €300,000 (in interest payments only!).

The chances are that we will not see margins go as low as we did in 2005-2007 any time soon, and even if we do …

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Banks taking a 'Stake' in property deals.

There were several articles about this in the press recently, mentioning banks taking an ‘interest’ or ‘equity stake’ in certain developments. Something that the articles failed to talk about was the underlying cause? When property was booming banks were not taking an equity stake, they would finance the deals but they didn’t tend to get in on the action, so why is it that during the downturn they would start to do this?

There are two ways of looking at this, one is the way that a lender would have you believe, the others is to aim for fair comment on what is an objective view.

First of all though, it is important to look at how debt affects liquidity, if a bank is seen to have any problems people start to withdraw money, that’s not speculation, that’s fact, it happened to Northern Rock, IndyMac and several other banks since. So there is no part of the market that is fully convinced when banks say that ‘we are …

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Banks taking a ‘Stake’ in property deals.

There were several articles about this in the press recently, mentioning banks taking an ‘interest’ or ‘equity stake’ in certain developments. Something that the articles failed to talk about was the underlying cause? When property was booming banks were not taking an equity stake, they would finance the deals but they didn’t tend to get in on the action, so why is it that during the downturn they would start to do this?

There are two ways of looking at this, one is the way that a lender would have you believe, the others is to aim for fair comment on what is an objective view.

First of all though, it is important to look at how debt affects liquidity, if a bank is seen to have any problems people start to withdraw money, that’s not speculation, that’s fact, it happened to Northern Rock, IndyMac and several other banks since. So there is no part of the market that is fully convinced when banks say that ‘we are …

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Interest Rates: The Fed, The Bank, and the ECB

Interest rates are again in the headlines as the Fed, the Bank of England and the ECB all had meetings. It may be a little known point but in the past there was some currency co-operation, namely the Plaza Accord and two years later the Louvre Accord and although there is no official ‘strategy’ we may start to notice that central banks act with at least some degree of collusion as they try to solve global economic issues. That last sentence might confuse, on one had interest rates are not connected to currency strengths but interest rates do have an effect on inflation and inflation can be brought about by currency manipulation (namely having too much in supply).

The Irish rate of inflation thus far in 2008 dropped from 5% in June to 4.4% according to the Central Statistics Office (CSO) the article in the Times didn’t mention if this was headline or core inflation. It has been our belief for some time that …

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The good thing about a Property Bubble

There is so much gloom and doom in the press recently that only those with the greatest fortitude seem to find any cause for happiness. Personally I have been talked down off the roof a few times already (philosophically not in reality). And hardly a day passes where the Government don’t give us some negative outlook news. If you are into sadomasochism there is a new way to get your kicks, it’s called the ISEQ and if you are truly sick you can always watch property prices.

However, today’s article is going to focus on the good life and the good things that are coming out of the property bubble and that will continue to serve us all better in the future (catastrophic losses aside)

1. The Bubble performed where the Government and Good Intentions failed: The Government and all of the good intentions in the world were never able to gentrify the north inner city (my former home), but the property bubble did a GREAT job! Walking down Sean McDermott Street or Gardiner Street after dark is no longer …

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Average loan life set to rise as we witness the death of the 'Switcher' mortgage.

For almost the last decade we saw a market develop where customers were king, and where banks competed for their business, this was an era where ‘refinancing’, ‘switching’, and ‘re-mortgaging’ became a common occurrence, in the 1990’s the re-mortgage market was very small in comparison to where it went from 2000 onwards. The reason for the upsurge was that loyalty doesn’t pay when it comes to the Irish banks, they were giving new borrowers better rates and charging existing borrowers more, the choice of fixed rates for an existing borrower were always more expensive than for the person who had jumped ship elsewhere and come to a bank as a fresh client.

Today we are seeing something that has long been unfamiliar, banks are intentionally being uncompetitive, pushing rates to the point where they are not doing any marginal lending and where their average loan is reaching higher and higher above the ECB currently several banks have broken the 6% mark meaning that rates are now at the highest they have been in almost a decade.

This means that lenders …

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Average loan life set to rise as we witness the death of the ‘Switcher’ mortgage.

For almost the last decade we saw a market develop where customers were king, and where banks competed for their business, this was an era where ‘refinancing’, ‘switching’, and ‘re-mortgaging’ became a common occurrence, in the 1990’s the re-mortgage market was very small in comparison to where it went from 2000 onwards. The reason for the upsurge was that loyalty doesn’t pay when it comes to the Irish banks, they were giving new borrowers better rates and charging existing borrowers more, the choice of fixed rates for an existing borrower were always more expensive than for the person who had jumped ship elsewhere and come to a bank as a fresh client.

Today we are seeing something that has long been unfamiliar, banks are intentionally being uncompetitive, pushing rates to the point where they are not doing any marginal lending and where their average loan is reaching higher and higher above the ECB currently several banks have broken the 6% mark meaning that rates are now at the highest they have been in almost a decade.

This means that lenders …

Read More