Are 100% mortgages the problem? Is LTV a symptom or a cause?

An article in the Independent yesterday pointed toward 100% mortgages being a significant attributer to the bubble, I would wager it was a symptom rather than a cause, the IBA meanwhile has called for all mortgages to be made on a non-recourse basis.

The good thing is that people and organisations are trying to find a way to avoid a repeat of the property bubble, and they are not one off events as the UK can testify.  There are however, significant factors contributing to what happened.

1: lenders didn’t price risk, they didn’t even ‘price at all’: Banks have utterly failed to do the job they were designed to do, namely that of profitable intermediation, we had huge amounts of competition on lending, that drove down criteria requirements and also compressed margins, then along came trackers, these had low margin price promises – Bank of Scotland brought them into Ireland and have since left. I spoke with a Bank exec. yesterday and he …

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Short Sale Loans or Negative Equity Loans

We were asked to make a presentation to the Department of Finance’s ‘Expert Group on Mortgage Arrears’ which is made up of the main interest groups and representative bodies in finance and housing. This firm has long been an advocate of market oriented solutions (short sales, moving paper etc.). However, in Ireland there are several issues.

Firstly, short-sales are not possible because of the manner in which recourse to the loan exists, it is on the person and not just the asset, this gives no incentive to lenders to accept a short sale except for people who are already financially strong, our debt laws also work against the borrower.

Secondly, as a shareholder in the banks it may not be in the interest of the shareholder (taxpayer) to bail out the individual, personally I don’t want to continue to shoulder costs for anybody, not our banks, borrowers or anybody else, I want taxes to go toward vital services and not much else. Any scheme should be revenue neutral or profitable.

That is where the idea …

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Taxing Banks & Taxing Risk

In the first clip, James Galbraith (son of the famous JK), economics professor at University of Texas, discusses whether a new tax on big banks is justified. Ken Bentsen, of the Securities Industry & Financial Markets Association, and Mark Calabria, of the Cato Institute, share their insight as well.

In the second clip Mark Walsh, of ‘Left Jab,’ and Dan Mitchell, of the Cato Institute, discuss taxing banks based on their risk to the system.

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Are you getting your full tax relief?

There was an article in one of Ireland’s national newspapers last week describing the major issues surrounding the rescinding and subsequent re instatement of mortgage Interest relief. For those who are uninformed about this subject, mortgage interest relief (or TRS) was suspended pending the requirement for every person that previously claimed relief to re-apply for it. This was not a move intended to deprive anyone of their entitlements, more a housekeeping exercise to make sure that things are as they should be.

Thousands of Irish home owners had their tax relief temporarily suspended so that a general process of reassessment could take place whereby people would ascertain that whatever they were receiving in tax relief was correct. The Government spends millions every year on the TRS scheme, and with the exchequer being frightfully strained like Mary Hearney doing a triathlon, it was a necessary to ensure that the recipients of tax relief at source were indeed fully entitled to it.

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Short selling, what is it? Why would a person do it?

When you’re bullish (think prices will rise) on the market or a stock, you go long (buy and hold, one day sell). When you’re bearish (think prices will fall), you go short, (sell and hold, one day buy). People often think you can only ‘buy and sell’ shares, well, you can also ‘sell then buy’ and that basically describes what happens when you ‘short’ a stock, often people think ‘short selling’ means you don’t hold the stock for long, as in ‘I bought Lloyds at 65p and sold the next day for 70p’, in that case you just didn’t ‘go long’, trading rapidly is not what short selling is, or is about (I only say this because it’s a thing I have been asked a few times).

Today we will take a look at how ‘short selling’ works.

1. In order to ‘short’ a stock you sell it first then buy it later. You do this in the belief that prices will go down, you’re hoping to …

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Rent to buy: The pitfalls in practice

Rent to buy is not a ‘new idea’, one of my mentors is a man who built over 10,000 homes in Dublin (he retired in the 70’s having started his business in the late 40’s), but in talking to him he spoke of almost exclusively selling houses in staged payments and renting them out to prospective buyers as a way of paying for the property.

The resurfacing of rent to buy is not evidence of the wheel being reinvented but purely of the prevailing economic environment, however, unlike the way it operated over thirty years ago, today renting to buy is having obligations stitched into the contract that may not be possible to meet in the future and therefore it leaves the renter/purchaser in some slight uncertainty.

One of the primary issues is that of ‘loan offers secured’. When you rent to buy you are essentially (in most cases) saying you will buy the property at a point in the future for the market value at the time of completion of …

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Some quick thoughts on inflation.

There are a few things that concern me regarding inflation, I have listed them as bullet points.

1. Paul Volcker said that he is concerned with the Fed and Treasury seeking ‘the amount of inflation conducive to recovery’. 2. Bank of England are engaged in Quantitative Easing (fancy talk for ‘Printing Money’), they had a failed bond this week as well which means they will (the UK) have to reassess their par on bond offerings. That means paying more to get the money, to service these loans they will likely devalue Sterling further. This matched with increased money supply will bring inflation to the UK. 3. Increased inflation risk is being priced into bonds. 4. Investment houses are increasingly driving people towards resources as a hedge against inflation because inflation doesn’t reward savers, it rewards those holding assets.

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Irish variable rates March 2009

Here are the variable rates on offer at present from Irish lenders

AIB variable 2.79% ICS variable <50% LTV 2.90% BOI variable <50% LTV 2.90% AIB LTV 50-80% 3.00% EBS variable 3.13% Halifax LTV<50% 3.15% KBC (12mth disc.std.var) 3.98% Haven variable 3.7% PTsb LTV<80% 4.1% PTsb LTV>80% 4.2% NIB variable 4.23% Bank of Scotland 4.23% First Active 4.5% Ulsterbank 5.4%

These variable mortgage rates are as of March 2009 ranked according to prices.

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The Criteria Crunch

We have just been informed that one the lenders we deal with are only getting through applications received by the 4th of March, that is a near 20 day delay on new applications they are considering. Why the backlog? Has the market suddenly recovered? Are they being flooded?

No, rather it is a case that in banks nearly everybody has been enlisted to work in ‘collections’ and the staff were taken from every other department, in particular the ‘new business’ section. The bank we are talking about today merged their direct channel with brokerage so even going via a branch makes no difference, the whole company has only four working underwriters.

So inasmuch as the credit explosion saw too many resources being thrown at lending and the expansion of same, the crunch is doing the exact opposite by overshooting the mark in the reduction of resources. For a publicly quoted bank to be 20 days behind means that the market is facing yet another hurdle in reaching its rational level. Lending hasn’t frozen, people are …

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