A whiff of fear and terror emanates from housing loan statistics that tell of an imploding Buy-to-Let property investment market. Ireland’s once exuberant amateur landlord and property investment class are ruing the day they got sucked in by the “wealth management” marketing pumped at them by Ireland’s bankers. They became the final rung in a gigantic property ponzi scheme.
Does anyone care? Should amateur investors have been protected by consumer health warnings and would they have been heeded them anyway? A consumer is a person not acting in their professional capacity and most Buy-to-Let investors were consumers.
It’s likely no one would have heeded regulatory health warnings had the Financial Regulator had a mind to issue them.
But the banks may have heeded a stringent capital adequacy brake on their lending instead of the gentlest of tugs applied by the Financial Regulator. When it did finally move to rein in aggressive lending by requiring banks to allocate more capital it was far too little and too late. It had arrived at the scene of an accident but didn’t know it.
Banks relationship manager teams sold loans as investments promoting the upside of leverage where nobody it appeared could lose.
Accountants got in on the act flogging tax efficient schemes to their clients. Stories abound of people not buying one but many houses and apartments to manage their tax liability with little thought for risk. The myth of “safe as houses” lured many to turn a deaf ear to warnings.
Stockbroker and banks “private client” divisions promoted property investment schemes to busy “high net worth” professionals who bought into full risk schemes where not only the money they invested, frequently borrowed, was at risk but everything else they owned as well.
Exotic foreign property schemes popped up on every corner promising “guaranteed” returns. The regulator stood off saying it didn’t have a role to play. Yet the schemes were being marketed as guaranteed and low risk investments.
Everyone flogged the upside of leverage but none warned of the downside when prices would collapse exposing investors to negative equity on their highly leveraged interest only loans. Many are now suffering from the sting in the tail of all too enticing capital repayment holidays as hefty repayments kick in on their negative equity property investment portfolios.
In the space a few years many people went from owning none to owning many units, building huge debt mountains they have no hope of financing.
Should the regulator, with its consumer protection mandate, been concerned with the way property was being sold as a packaged investment scheme without any health warnings or requirement to provide proper advice? It spends vast resources ensuring that insurance, pensions, investments and home mortgage selling is regulated. Should it have been concerned as the already overheated housing market was amplified by an insatiable investor demand?
Developers and builders upped capacity joined by amateur local partnerships and overshot demand, producing tens of thousands of units no one wanted.
Ireland’s amateur investors increased their borrowings between March 04 and March 08 loan by €23.2bn. Total loans exploded by 232% contrasted with homeowner loans increasing by 89%. Since mid 2008 the Buy-to-Let market has imploded. In the first quarter of 2007 nearly 8000 loans of €1.9bn were issued. This year the market shrunk to 2200 loans of only €584m. Of greater concern is the declining loans total. It’s down just over 10% from peak volume.
The last thing needed is a glut of amateur investors selling property at any price to limit their losses. They may have started. For two consecutive quarters to March this year total loans outstanding have dropped. How many vacant housing units for sale are owned by investors is unknown. As no one is buying them, the empty ones are probably the investors dream-cum-nightmare.
The childhood nightmare of sitting in the classroom in your underwear hoping no one would notice is haunting Irish amateur investor households struggling under the weight of property investment debt.
Just like the nightmare, the amateur investor thinks they are the only one with no clothes on. But what they don’t know is others think they too are the only ones in their underwear. No one is breathing a word about their new-found poverty. With every passing month, losses mount as prices decline and loan costs increase while rents tumble.
Should the state arrange a “nightmare” bailout scheme? Most people would probably think not. Why should tax payer’s money go to financing amateur investors losses?
The professional landlord class with its huge loan exposures may buy some time with bankers and NAMA. But tens of thousands of others who don’t owe enough to matter will rue the day they listened to the young wealth managers convincing spiel and friends bar stool advice.
Yet so far there has been no talk of helping homeowners who property values have dropped partly because of amateur investor’s dreams overshot demand partly because of what seemed to be an insatiable demand for investment property.
Meanwhile there is little indication that lessons from the property bubble are being learned.
As Government plans to deliver on a new financial regulatory system has it considered how to prevent another property bubble? Free market unfettered forces including unsophisticated investors fuelled the bubble. As yet there doesn’t seem to be any move to enquire into what went wrong and how to prevent a housing bubble happening again.
Saturday, June 13, 2009
Wednesday, June 10, 2009
Fairytale continues as Anglo tries to create a silk purse from a sow's ear
Anglo Irish Bank gave what can only be described as a lack lustre performance during yesterdays Oireachtas Committee grilling. With a broken business model that cannot be fixed the total cost to the tax payer remains unknown as the €4bn being transfused into its shattered balance sheet is an advance instalment.
Its “worst case” estimate is that another €1.5 to €3.5bn may be needed from the tax payer’s purse even after a NAMA bail out. This means that if NAMA takes the toxic loans and allied good ones off the banks hands, the bank will still end up with upwards of €3.5bn impaired loans. And it says it can only guess at how much NAMA will buy and at what price. The figure may be higher or lower.
Unfortunately worst case estimates have a habit of subsequently becoming hard balance sheet facts in Irish banking. Still the only figure that can be admitted to under accounting rules is the actual exposure today as predictive estimates are not allowed. Apparently this explains why Anglo’s accounts last September were not a fairy tale. It seems that even where you know the truck is about to hit your best friend you are not allowed warn him. In bank accounting you must wait until it does and then tell him it has. Having been hit by one truck costing €4.bn, Anglo is however indicating there is chance of another one coming along that could cost another €3.5bn.
Much was made of the systemic risks of an orderly wind down which is strange given the board has only been tasked with operating the bank as a going concern. But what does going concern mean? So far the going concern business plan includes one thing and that is to prevent the collapse of the bank by stabilising it, hence the infusion of billions in ECB deposits and €4.bn infusion of tax payer’s funds (which will almost certainly never be recovered). The rest of the going concern plan is being discussed with the Minister for Finance and according to its Chairman will result in a viable bank – which is a bit like saying it’s a plan to create a bank.
Critical detail was missing and no indication was given what size bank it would become and what it would actually do to become viable save to say that it would be smaller. The business case is to stabilise it or what’s called “de-risk the balance sheet” which will make it smaller but not viable. The viable bit will mean crafting a silk purse from a sow’s ear.
Pressed to explain what investment loans meant, Anglo admitted they were mainly property loans. Finally the emperor’s clothes were found and 84% of its entire business is in financing property. And Anglo is becoming a major landlord as it takes possession of property. Essentially it financed anything that would be bought, rented, shopped in, stayed in or played on by consumers. It was a gigantic Ponzi scheme where pieces of larger deals were carved into smaller morsels for investors to take a punt on with the bank earning huge fees and increasing lending margins.
It seems the banks board could not fully consider a wind down option as its hands were tied by a Government who tasked it with running the bank as a going concern.
Mr Lenihan hasn’t the foggiest notion of what this means and judging by yesterday’s performance Anglo doesn’t know either. How could they? The cost of bailing the thing out will eradicate any notion of its continuing existence as a bank. But the charade continues. One must use the words “going concern” instead of “orderly wind down” or else investors won’t provide the funding to keep it from collapsing. If there’s a viable business plan and Government backing it seems investors will be persuaded to invest. The fairy tale continues…
Its “worst case” estimate is that another €1.5 to €3.5bn may be needed from the tax payer’s purse even after a NAMA bail out. This means that if NAMA takes the toxic loans and allied good ones off the banks hands, the bank will still end up with upwards of €3.5bn impaired loans. And it says it can only guess at how much NAMA will buy and at what price. The figure may be higher or lower.
Unfortunately worst case estimates have a habit of subsequently becoming hard balance sheet facts in Irish banking. Still the only figure that can be admitted to under accounting rules is the actual exposure today as predictive estimates are not allowed. Apparently this explains why Anglo’s accounts last September were not a fairy tale. It seems that even where you know the truck is about to hit your best friend you are not allowed warn him. In bank accounting you must wait until it does and then tell him it has. Having been hit by one truck costing €4.bn, Anglo is however indicating there is chance of another one coming along that could cost another €3.5bn.
Much was made of the systemic risks of an orderly wind down which is strange given the board has only been tasked with operating the bank as a going concern. But what does going concern mean? So far the going concern business plan includes one thing and that is to prevent the collapse of the bank by stabilising it, hence the infusion of billions in ECB deposits and €4.bn infusion of tax payer’s funds (which will almost certainly never be recovered). The rest of the going concern plan is being discussed with the Minister for Finance and according to its Chairman will result in a viable bank – which is a bit like saying it’s a plan to create a bank.
Critical detail was missing and no indication was given what size bank it would become and what it would actually do to become viable save to say that it would be smaller. The business case is to stabilise it or what’s called “de-risk the balance sheet” which will make it smaller but not viable. The viable bit will mean crafting a silk purse from a sow’s ear.
Pressed to explain what investment loans meant, Anglo admitted they were mainly property loans. Finally the emperor’s clothes were found and 84% of its entire business is in financing property. And Anglo is becoming a major landlord as it takes possession of property. Essentially it financed anything that would be bought, rented, shopped in, stayed in or played on by consumers. It was a gigantic Ponzi scheme where pieces of larger deals were carved into smaller morsels for investors to take a punt on with the bank earning huge fees and increasing lending margins.
It seems the banks board could not fully consider a wind down option as its hands were tied by a Government who tasked it with running the bank as a going concern.
Mr Lenihan hasn’t the foggiest notion of what this means and judging by yesterday’s performance Anglo doesn’t know either. How could they? The cost of bailing the thing out will eradicate any notion of its continuing existence as a bank. But the charade continues. One must use the words “going concern” instead of “orderly wind down” or else investors won’t provide the funding to keep it from collapsing. If there’s a viable business plan and Government backing it seems investors will be persuaded to invest. The fairy tale continues…
Monday, June 8, 2009
Important debt management initiative revealed
At a time when tens of thousands of Irish households are experiencing severe debt repayment problems for the first time, an important initiative between the Irish Bankers Federation (IBF) and Money Advisory & Budgeting Service (MABS) has been unveiled.
Called “Working Together to Manage Debt”, it’s a voluntary operational protocol establishing a practical response to unaffordable consumer indebtedness. Critically the concept of an organised, agreed debt settlement process – paying off less than what is owed- is recognised.
However as people frequently have loans from more than one lender, who may not all be IBF members, the protocol doesn’t cover a multi-lender debt settlement scenario.
Ireland’s debt collection law is an antiquated legal relic, reflecting Victorian societal attitudes.
Our bankruptcy laws are draconian, expensive and wholly inadequate. Until now consumer bodie’s advocacy for an alternative legal debt settlement process has fallen on deaf ears. Irish citizens deserve access to a modern legal debt settlement process found elsewhere in more enlightened, socially just jurisdictions. The joint IBF/MABS initiative is one that Government and its regulatory agencies should now move to codify in law and regulations.
Whatever about debt settlements, for many accessing credit is now almost impossible. Internationally documented, credit crisis have in almost all cases led to prolonged credit rationing lasting long after the initial crisis has passed. Bankers may have the money to lend but fearing losses and adopting risk adverse behaviours, their lending is curtailed for all but the most creditworthy of customers.
Foreign owned banks are not passing on in full ECB rate reductions, as they march to the tune of a different backer. It is understandable as British, Danish or Belgian tax payer’s funds will hardly be diverted to sustaining lower rates in Ireland. With Irish covered banks unwilling to take on others loans, creditworthy customers have become captive of their existing banks interest pricing policy. And many are paying higher rates as a result. Meanwhile one covered bank, the EBS, reflecting pressure on interest income and funding costs, is reported to be petitioning Government to increase rates charged to its existing customers. Other covered banks similarly, though not as acutely exposed are holding down rates for now. But this may not last.
Apart from higher interest rates, Irish consumers are becoming increasingly aware of their personal credit rating. While not a substantial feature of boom time banking with its ready supply of cheap, convenient credit – consumer awareness will heighten. As banks tighten credit policy, a person’s credit rating will become their passport to affordable credit. An increasing number of people may become marginalised and forced to borrow at higher rates reflecting their “risk profile”.
The dominant rating agency, the Irish Credit Bureau, which provides both an historic record of borrowing behaviour and predictive scores of future behaviour, is used by all major lenders in loan decisioning. As yet it’s too early to tell if banks will charge risk adjusted rates to different people based on their risk rating profile.
Meanwhile as Governments reform of banking regulation continues behind closed doors, IFSRA’s twin “oversight” Industry and Consumer panels have both been critical of the lack of consultation and public dialogue on regulatory reform. The consumer panel has suggested that consumer financial products should be licensed for use similar to the way in which medical drugs are regulated. That is, they should be certified as fit for use by consumers. There is much to be said for this approach which is a feature found elsewhere.
Other regulatory regimes effectively control the development of consumer risk products for example inhibiting 100% mortgages and features such as discounted rates. Opponents to product regulation, mainly bankers and industry insiders, argue it stifles innovation. But such arguments fall apart when the inflationary property price impact of larger loan to income, 100%+ mortgage and interest only lending to homeowners and amateur landlords is considered. The lending and borrowing that fuelled the property boom could have been curtailed had an effective consumer product regulatory regime been implemented.
As credit is rationed, many will be forcibly weaned off a rich diet of cheap affordable consumer credit. This may not be such a bad thing as people save to spend later rather than borrow now and pay later. But the effects of bank rationing and consumer declining use of bank credit are known.
Prolonged recessions and slow recovery paths are partially caused by prolonged bank credit rationing from bankers reluctant to turn the tap back on and consumer’s reluctance to drink from the trough. Government has yet to provide a cogent banking policy to turn the credit tap back on and get people prudently borrowing again. Its policy has not yet addressed consumer indebtedness, credit rationing and use of credit in a post crisis economy.
Called “Working Together to Manage Debt”, it’s a voluntary operational protocol establishing a practical response to unaffordable consumer indebtedness. Critically the concept of an organised, agreed debt settlement process – paying off less than what is owed- is recognised.
However as people frequently have loans from more than one lender, who may not all be IBF members, the protocol doesn’t cover a multi-lender debt settlement scenario.
Ireland’s debt collection law is an antiquated legal relic, reflecting Victorian societal attitudes.
Our bankruptcy laws are draconian, expensive and wholly inadequate. Until now consumer bodie’s advocacy for an alternative legal debt settlement process has fallen on deaf ears. Irish citizens deserve access to a modern legal debt settlement process found elsewhere in more enlightened, socially just jurisdictions. The joint IBF/MABS initiative is one that Government and its regulatory agencies should now move to codify in law and regulations.
Whatever about debt settlements, for many accessing credit is now almost impossible. Internationally documented, credit crisis have in almost all cases led to prolonged credit rationing lasting long after the initial crisis has passed. Bankers may have the money to lend but fearing losses and adopting risk adverse behaviours, their lending is curtailed for all but the most creditworthy of customers.
Foreign owned banks are not passing on in full ECB rate reductions, as they march to the tune of a different backer. It is understandable as British, Danish or Belgian tax payer’s funds will hardly be diverted to sustaining lower rates in Ireland. With Irish covered banks unwilling to take on others loans, creditworthy customers have become captive of their existing banks interest pricing policy. And many are paying higher rates as a result. Meanwhile one covered bank, the EBS, reflecting pressure on interest income and funding costs, is reported to be petitioning Government to increase rates charged to its existing customers. Other covered banks similarly, though not as acutely exposed are holding down rates for now. But this may not last.
Apart from higher interest rates, Irish consumers are becoming increasingly aware of their personal credit rating. While not a substantial feature of boom time banking with its ready supply of cheap, convenient credit – consumer awareness will heighten. As banks tighten credit policy, a person’s credit rating will become their passport to affordable credit. An increasing number of people may become marginalised and forced to borrow at higher rates reflecting their “risk profile”.
The dominant rating agency, the Irish Credit Bureau, which provides both an historic record of borrowing behaviour and predictive scores of future behaviour, is used by all major lenders in loan decisioning. As yet it’s too early to tell if banks will charge risk adjusted rates to different people based on their risk rating profile.
Meanwhile as Governments reform of banking regulation continues behind closed doors, IFSRA’s twin “oversight” Industry and Consumer panels have both been critical of the lack of consultation and public dialogue on regulatory reform. The consumer panel has suggested that consumer financial products should be licensed for use similar to the way in which medical drugs are regulated. That is, they should be certified as fit for use by consumers. There is much to be said for this approach which is a feature found elsewhere.
Other regulatory regimes effectively control the development of consumer risk products for example inhibiting 100% mortgages and features such as discounted rates. Opponents to product regulation, mainly bankers and industry insiders, argue it stifles innovation. But such arguments fall apart when the inflationary property price impact of larger loan to income, 100%+ mortgage and interest only lending to homeowners and amateur landlords is considered. The lending and borrowing that fuelled the property boom could have been curtailed had an effective consumer product regulatory regime been implemented.
As credit is rationed, many will be forcibly weaned off a rich diet of cheap affordable consumer credit. This may not be such a bad thing as people save to spend later rather than borrow now and pay later. But the effects of bank rationing and consumer declining use of bank credit are known.
Prolonged recessions and slow recovery paths are partially caused by prolonged bank credit rationing from bankers reluctant to turn the tap back on and consumer’s reluctance to drink from the trough. Government has yet to provide a cogent banking policy to turn the credit tap back on and get people prudently borrowing again. Its policy has not yet addressed consumer indebtedness, credit rationing and use of credit in a post crisis economy.
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