Shortage of Mortgage Funds

In the UK it is becoming increasingly difficult to obtain mortgages. First Direct suspended new mortgages recently as have Halifax. The number of available mortgages has been reduced by nearly 40% this week. This is because of the credit crunch and the non-availibility of funds on the wholesale interbank market. This has forced the rise in the cost of this money which is being passed on to the consumer. First Direct claim that they have suspended their new mortgages because they cannot cope with the demand and need to suspend issuing new loans to be able to deal with the backlog. In the UK part of the demand arises from lenders coming off discounted fixed products and looking for cheap alternatives. These are becoming less and less available. However the problem is not only for people refinancing but also for purchasers. According to the Financial Times one third of housing deals are falling through because of the non-availibility of funds..

In Ireland while house prices are still falling the rate of the reduction is less than what it was. The fall was 1.2% in November, 1.4% in December, .8% in January and .7% in February. However if mortgages become as unavailable as they are in the UK and if the cost of lending rises this will obviously add to the problems with the housing market and can only lead to a more rapid rate of decrease in the cost of property.


Problems in Obtaining Mortgages

Credit is becoming more difficult to obtain because of the rise in the cost of inter-bank borrowing since last Autumn. This has led to a rise in the cost of money to borrowers. People on tracker mortgages won’t be affected. However people looking for new tracker mortgages will have to pay more. As the credit crunch continues the cost of borrowing will rise further. As a consequence lending criteria will get stricter and the loan to value ratio will fall. In Britain some of the lenders, such as First Direct, have stopped lending because of the demand for their products. This arose with people coming off fixed rates who were looking for attractive alternatives. First Direct became inundated with applications. It was a question of either increasing interest rates dramatically to discourage applicants or withdrawing loans to new customers to enable them to clear the backlog. However in Ireland the demand for residential mortgages is at its lowest in 14 years according to Central Bank statistics. This decline reflects the decline in house sales as shown by the recent figures published by Permanent TSB and ESRI. However these figures show that the rate of decline was not as sharp in January/February as it was in November/December. 


Funding of Irish Banks

According to S&P’s recent report on Irish banks wholesale funding accounts for between 46% and 48% of the needs of the banks equivalent to the European average. The reluctance of banks to lend to each other has caused the interbank interest rate to go well above the key European Central Bank rate. The Irish Banks have relatively small exposure to the troubled asset classes including the U.S. subprimes and the bond insurers (monolines). Irish Permanent and Anglo Irish Bank are more vulnerable than AIB and Bank of Ireland. 

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Switching Mortgages in the UK

In the UK borrowers wishing to switch mortgages are running into problems as a consequence of Lenders pushing rates up and tightening lending criteria. Lower property valuations is intensifying the pressure on homeowners to find new mortgages forcing borrowers to stay with their existing lenders at often unaffordably increased interest rates. People who have invested money in renovating property find that the revised value does not cover the work done. Also high loan to value mortgages have become unavailable

Ratings of Irish Banks

Standard & Poors ratings of Irish Banks last September stated that all Irish banks had experienced a rise in their wholesale funding needs, driven by a sustained period

of high credit growth leaving Irish banks with a relatively high reliance upon wholesale funding compared with most banking systems. S&P found that Irish banks were comfortably managing their liquidity requirements while loan growth was expected to slow. While term wholesale funding was scarce, access to interbank deposit markets was sound and there remains some access to most CP markets. Customer deposit inflows (both retail and corporate) were solid. In addition, the ability to pledge eligible mortgage assets with the Central Bank provided a further source of funding. And usage of securitization was more modest than in the UK. Permanent TSB and IIB Bank had the highest reliance upon wholesale funding

At that time average reliance on wholesale funding was 50% for French banks; 66% for German banks; 50% for Italian banks; 55% for Nordic banks; 49% for Spanish banks; 45% for UK banks and 55% for Benelux  banks.

In relation to Irish banks wholesale funding accounted for 44% for AIB, 46% for Bank of Ireland, 36% for Anglo Irish Bank and 65% for Permanent TSB. Customer deposits accounted for 47% of AIB funding, 41% of Bank of Ireland, 64% of Anglo Irish Bank and 35% of Permanent TSB.


Irish Banking System

According to the Daily Telegraph of last week the Irish property slump is creating dangers for the Irish Banking system. Prof. Nouriel Roubini in an interview in the recent issue of Business & Finance magazine says we are potentially facing greater problems than the United States because our construction industry comprises a larger share of the our economy. Given that US Banks are now failing, what is the future for Irish financial services? An international banker interviewed in the Sunday Business Post states that although Irish Banks have a minimal exposure to the sub-prime crisis, what are regarded as Irish prime mortgages will be shown to be less than that given the 100% lending that was taking place and the fall in the value of property over the last 12 months. With the fall in the loan-to-value ratios and defaults coming on stream, banks will start taking hits. In addition because of the social partnership the Government will not allow the banks to repossess large numbers of homes causing further hits for the banks. All this conjecture leads to the question “are our banks going to fail”?


Tax Relief on Mortgages

Since 2006 there has been a maximum tax relief benefit accruing to first time buyers of €2,400 per year for couples purchasing homes in respect of mortgage interest relief. This amounts to €200 per month between the couple. This maximum benefit is dependent on the mortgage being approximately €400,000 and an interest rate of 5%. If the amount of the mortgage and/or the interest rate is less than this than this the tax benefit will be less. The tax benefit amounts to 12% of the interest liability. The tax benefit at this level will last for 7 years including the first year.

Land Registry fees

Anyone buying a property will be advised by their Solicitor that there are certain outlays to be incurred in addition to the Solicitor’s fee. One of these outlays is the registration fee. This fee – as is clear from its description – relates to the cost of registering the person’s ownership of the property. There are two types of registration – Land Registry and Registry of Deeds. Most property is registered in the Land Registry. If the property you are buying is registered in the Land Registry, you have to pay Land Registry fees. If the property you are buying is not registered in the Land Registry – what is called unregistered land – your ownership of the property has to be registered in the Registry of Deeds. The Registry of Deeds charges are clear and simple. As of now the cost of registration is €44 per document. Most people buying property will have to register two documents, the Purchase Deed and the Mortgage Deed. So the cost will be €88. These fees are due to go up in May 2008 to €50 per document. The Land Registry fees are considerably more obtuse and irrational – not to say esoteric. If you buy a second hand land registry property for less than €255,000, the land registry fee will be €375. You will also have to pay €125 to register your mortgage. If you buy a property for more than €255,000 and less than €385,000, the land registry fee is €500 plus €125 for the mortgage. If you purchase for more than €385,000 the charge will be €625 plus €125 for the mortgage. That’s the simple part. If you buy a new house (not apartment) the registration fee will depend on how the purchase price is structured. When you buy a new property the price is normally divided into two parts, the site price and the building cost. The registration fee is calculated on the site price. So if you buy a new property for, say, €500,000 and the price is divided into €50,000 for the site and €450,000 for the building cost, you will pay Land Registry fees of €250 to register the purchase, €60 to open a new folio and €125 to register the mortgage. However if the price is integrated into one contract where the site price and building cost are not divided – which is often the case – the fee to register the purchase will be €625,  together with €60 to open a new folio and €125 to register the mortgage. There is a discrepancy of €375 between these two charges. There is no logic to any of this. If you buy a new apartment the charges will be as follows: €85 to register the ownership of the apartment, €60 to register the new lease and €125 to register the mortgage. These charges are considerably less than the charges for registering the new house. There is no reason for this. In fact from the Land Registry’s point of view there is more work involved in registering the new apartment than registering the new house. This whole cost structure needs to be overhauled and simplified. It is costing the purchaser and is user unfriendly. It also makes it difficult for the Solicitor to quantify the actual Land Registry charges. As a consequence purchasers are – more often than not – being overcharged. The Registry of Deeds are increasing their charges shortly. I am not aware that the Land Registry are planning something similar. However with the movement towards e-conveyancing i.e. the move towards having the conveyancing process transacted over the internet, there is push by the Government to have all property registered in the Land Registry. In due course the Land Registry will be the only registration system and the Registry of Deeds will become redundant. In this context there is an urgent need to rationalise the Land Registry costs structure to something similar to the Registry of Deeds system.  

Rental Market

According to the recent Daft report on the rental market the supply of rental accommodation has increased almost twofold in the last year. How can this be explained? The Daft report suggests that the increase in supply arises from investors letting out property which had previously not been let out because the increase in mortgage interest rates have forced investors to recoup these increases by way of rental income where the properties had been previously been unoccupied. This is a speculative and unlikely explanation. Other commentators suggest that the substantial increase in rental property arises from Builders/Developers letting out their recently completed developments rather than selling them because they cannot get the prices that they require. Whatever the reason it is an anomaly given that investors have stopped investing in the Irish market since the interest rates started to rise and the prices to fall. Daft suggests that since the middle of last year the supply of rental property has begun to outstrip demand. This will lead to a fall off in rental increases. Will this affect the housing market? There has been a presumption around that because of the increase in rents over the last 18 months renters will be inclined to come back into the house marketing and start buying again. However if rents start to stabilise or fall this pressure will be reduced. In addition since the implementation of the Residential Tenancies Act 2004 giving tenants occupational rights tenants have more security of tenure since they had before. Had this legislation had an effect on the housing market? Has any research been done on this?  

lack of information on property market

The lack of statistical information on movements in the housing market in Ireland is strikingly obvious. It is impossible to get official information on the decline in property prices over the past year as against, say, 2006. The same applies to the number of houses for sale and how long they have been for sale. In a market which is dependent on confidence and therefore information it is essential that people have this information available in order to make decisions as to whether they are going to buy or sell. In the digital age this information should be easily accessible as it is in other countries.