Rory Gillen : Why Irish Mortgage Margins Are Competitive!

[LDFerguson]

I see Rory Gillen has published this piece on his website today. Is he calling this campaign fake news? Is he calling @Brendan Burgess populist?

[broken link removed]

Now, having stirred the pot, I'll just sit back and read the responses for a while.

 

[Gordon Gekko]

I saw the article but haven’t read it yet. Interesting. I’ve always thought that higher Irish rates are justified TBH.

EDIT: I didn’t realise that it’s so short, so now I have read it. Decent piece as always from Rory Gillen. He speaks a lot of sense.

 

[Brendan Burgess]

Hi Liam

It's a very strange article trotting out many of the usual justifications for higher mortgage rates.

There is no doubt that it's very difficult to get possession in Ireland. There is no doubt that Irish banks require higher capital than in other countries.

But this only accounts for a very small part of the increased costs.

It's a bizarre argument from the banks to say "We must charge more because of the very high default rates and the difficulty in getting possession" but then the same banks charge the same rate to someone with 120% LTV and 50% LTV.

The mortgage rates for 90% LTV lending might be about right. But the rates for 60% LTV lending are way too high.

In Ireland, unlike in a number of EU countries, there are no upfront costs levied by banks in processing a mortgage.

Well then, why doesn't an Irish bank differentiate itself by charging new customers an admin fee? Instead, they do the very opposite and provide cash-back.

One doesn't see European banks queuing up for a share of the Irish mortgage market most likely because they understand that our mortgage market offers slim pickings.

Well we have just seen Avant Money enter the market. They have a low rate for <60% LTV mortgages and their rates for 90% LTV mortgages are about the same as the best of the rest.

Then Rory makes the bizarre point:

In preparation for this article, I made enquiries with four Irish mortgage providers and got a 'No' from all four for the following mortgage request; a late-20s married couple with a 40% deposit, both working (engineering and hospitality industries), although temporarily receiving partial Covid-19 support payments.

In my view, the above mortgage application is a very low-risk one. This couple's earnings capacity is likely to rise substantially from here given their age profiles. And the couple's 40% deposit is a huge margin of safety against falling house prices.


He thinks that lenders should provide mortgages to people who are not working because they have potential?

Rory is good on investment issues. He clearly has no idea about mortgages or the Irish mortgage market.

His final comment:

If I was to start again, I think I'd come back as a mortgage provider. It looks like shooting fish in a barrel.

contradicts everything he has said before in the article.

Brendan

 

[Gordon Gekko]

Hi Brendan,

If people are being price-gouged, then why aren’t a load of new entrants coming in?

It’s a small market with an anti-banking culture where it’s almost impossible to repossess a property. And, as Rory rightly points out, Irish banks have much higher costs, significantly so, through the levy and the additional capital buffers.

I tend to agree with nearly all of what he is saying. As an analyst of banks, I think he’s well-placed to offer an opinion on how banks price their main products.

 

[NoRegretsCoyote]

It's a bizarre argument from the banks to say "We must charge more because of the very high default rates and the difficulty in getting possession" but then the same banks charge the same rate to someone with 120% LTV and 50% LTV.

The mortgage rates for 90% LTV lending might be about right. But the rates for 60% LTV lending are way too high.

I used to think this, but I changed my mind.

The Central Bank chart below shows accounts in arrears where some payment was made. You can see that accounts with LTVs lower than 50% were less likely to make any payment than those with LTVs 51% - 60%!!! This was the case for mortgages by every length of arrears.

Yes there are other things going on, and at higher LTVs the probability of payment declines as your LTV grows.

But it's simply not the case that low LTV = low risk.

 

[Brendan Burgess]

Hi Gordon

Well we do have a new entrant - Avant Money.

Banks have been slow to move outside their own markets in recent years.

And you are expecting rational behaviour by banks. They do not always act rationally.

I have pointed out for a long time that about half of Irish mortgage lending i.e. low LTV lending is extremely profitable and Avant Money has targeted this market.

They are doing exactly what I say they should be doing.

1. Lending to lower risk borrowers in a market where we don't allow possessions
2. Charging a fee up-front instead of paying cash back
3. Aggressive LTV pricing

Brendan

 

[Brendan Burgess]

But it's simply not the case that low LTV = low risk.

Hi Coyote

What the lender needs to look at is the Loss Given Default.

If you have a 50% LTV mortgage and stop making payments, the bank continues to charge interest and will eventually have their full mortgage repaid.

I saw that table at the time, and thought it was very curious.

This is what it is telling you...

Of those people who had an LTV of <50%
Who are over 2 years in arrears,
29% have made no payment in over 6 months.

That is not telling you very much.

What would tell you something is

Of those people who had an LTV of <50%
what percentage have made no payment in over 6 months?

But even that won't tell you very much about the Loss Given Default.

Brendan

 

[NoRegretsCoyote]

What the lender needs to look at is the Loss Given Default.

If you have a 50% LTV mortgage and stop making payments, the bank continues to charge interest and will eventually have their full mortgage repaid.

Thanks @Brendan Burgess , you and I know LGD in this situation is effectively zero.

I don't know the regulatory requirements well but AFAIK banks are required to issue capital or similar instruments for these kind of NPLs, and this is costly.

These are the rules, presumably set at EU level, and there is not much that an Irish commercial bank can do about it.

 

[LDFerguson]

In preparation for this article, I made enquiries with four Irish mortgage providers and got a 'No' from all four for the following mortgage request; a late-20s married couple with a 40% deposit, both working (engineering and hospitality industries), although temporarily receiving partial Covid-19 support payments.

In my view, the above mortgage application is a very low-risk one. This couple's earnings capacity is likely to rise substantially from here given their age profiles. And the couple's 40% deposit is a huge margin of safety against falling house prices.

Hi Brendan,

This couple are working. But they're in receipt of Covid support payments. Unlike Rory, I would agree with a decision by the banks not to lend to them, regardless of the LTV. Clearly both their employers have been negatively impacted by the pandemic or else they wouldn't have qualified for the payments. One works in the hospitality industry. Sadly I think it may take a long time before that industry fully recovers.

Let's pretend I'm a bank. Why would I lend money to two people where their jobs are at risk? As a bank, the LTV is only of comfort to me if I repossess the house, which as we all know takes years and is very expensive to do. I don't want to repossess the house. I only want to lend to people who I'm as sure as I can be that they will be able to keep up the repayments.

 

[NoRegretsCoyote]

Let's pretend I'm a bank. Why would I lend money to two people where their jobs are at risk? As a bank, the LTV is only of comfort to me if I repossess the house, which as we all know takes years and is very expensive to do. I don't want to repossess the house. I only want to lend to people who I'm as sure as I can be that they will be able to keep up the repayments.

Exactly. If repossession was quick and easy then banks would lend happily to 60% But reposession is very slow, so they don't.

The other thing is that prolonged repossession is administratively costly in terms of staff resources and legal fees.

And, as Rory rightly points out, Irish banks have much higher costs, significantly so, through the levy and the additional capital buffers.

There is fixed cost to regulation, and in Ireland it is spread across a much smaller number of customers than in a big market. PTSB actually shrank its balance sheet so that it no longer has the costs associated with being supervised by the ECB anymore!

 

[Sarenco]

I think the point often gets missed that the average interest rate charged on all outstanding mortgages in Ireland is pretty much bang in line with the equivalent Eurozone average. Obviously that includes super cheap trackers from the party years.

 

[Brendan Burgess]

I think the point often gets missed that the average interest rate charged on all outstanding mortgages in Ireland is pretty much bang in line with the equivalent Eurozone average.

Hi Sarenco

It wasn't missed for a long time because that is what the banks and Central Bank kept highlighting despite its irrelevance.

It's when I highlighted that they were classifying restructured trackers as new business that the truth about what Irish mortgage holders were paying came out.

Hopefully Avant will show what the fair rate on new low ltv mortgages should be.

Brendan

 

[Brendan Burgess]

If repossession was quick and easy then banks would lend happily to 60%

That is not correct.

Banks primary assessment is the ability to repay. The lower LTV is only a back stop for them.

If someone has a very low LTV but a poor credit record for example, they will not get a mortgage from a mainstream lender. And making repossession easier, would not change that.

Brendan

 

[Sarenco]

It wasn't missed for a long time because that is what the banks and Central Bank kept highlighting despite its irrelevance.

Well, it's certainly relevant from the banks' perspective!

I think it's interesting that Irish lenders charge roughly the same rates on their mortgage back books as their Eurozone counterparts (on average), despite having far higher capital costs.

 

[NoRegretsCoyote]

If someone has a very low LTV but a poor credit record for example, they will not get a mortgage from a mainstream lender. And making repossession easier, would not change that.

Indeed, perhaps I was being glib.

But at the margin easier reposssion would loosen lending standards a bit.

Otherwise I think you are basically wrong. Credit risk modelling is a thing. Banks spend money on people with PhDs in statistics to mine the data.

If they could identify a very low risk demographic (say teachers in Cork with an LTV <50%) they would exploit it and offer lower rates to these groups to grab market share. But banks generally don't.

I have no insider knowledge but I've read the Central Bank research over the years. There is a surprisingly high incidence of default at both low LTI and low LTV.

This means all mortgage lending is risky and this is costly for banks for the reasons I've explained.

 

[DublinHead54]

Then Rory makes the bizarre point:

In preparation for this article, I made enquiries with four Irish mortgage providers and got a 'No' from all four for the following mortgage request; a late-20s married couple with a 40% deposit, both working (engineering and hospitality industries), although temporarily receiving partial Covid-19 support payments.

In my view, the above mortgage application is a very low-risk one. This couple's earnings capacity is likely to rise substantially from here given their age profiles. And the couple's 40% deposit is a huge margin of safety against falling house prices.


He thinks that lenders should provide mortgages to people who are not working because they have potential?


Brendan

I agree this is a strange point.

The bank assesses your eligibility based on the mortgage application and the supporting evidence. The LTV plays an important part in repossession but not really for the ability to service the loan monthly. If I lend the applicant 100k but they have no income due to COVID they can't service the loan no matter whether that loan amount is 25%, 50% or 90% LTV.

From a portfolio credit risk point of view obviously lending at lower LTVs makes the overall mortgage portfolio less risky. But a bank will be modelling a host of variables such as default rates, house price decreases etc. In the case above if you start lending to a host of people with a higher chance of default it will increase the capital you need to hold etc.