LENDER KBC Bank has made it more expensive for both new buyers and for those who transfer their home loan to it to take out a mortgage.

KBC is one of the few lenders accepting mortgage switches. However, yesterday the bank said it would increase the interest for new residential customers who opted to take out a two-year or three-year fixed rate.

The two-year rate goes from 3.45pc to 3.70pc, with the three-year rate rising from 3.75pc to 3.90pc. The new rates are effective from October 1.

The mortgage lender left its standard variable rate unchanged.

Director of mortgage services at broker body PIBA, Rachel Doyle, said any home owner who did not have a tracker would be well advised to lock in to a fixed rate now. “Rates, both variable and long-term fixed, are on the rise so delaying a decision could be costly.”

AIB has one of the best three-year fixed rates at 3.65pc, while Irish Nationwide offers the same rate for those borrowing less than 80pc of the value of the home.

Irish Independent

MORTGAGE HOLDERS may face the prospect of their mortgages being written down in value if a US private equity firm which is part of a consortium bidding for the Educational Building Society (EBS) is successful with its offer.

Billionaire investor Wilbur Ross, whose company is part of a consortium led by Irish firm Cardinal which is bidding for the 75-year-old financial institution, said it would consider cutting the mortgage interest repayments that customers would be required to pay to service their mortgages.

Speaking on CNBC television, Mr Ross said banks may have to write down mortgages if a bank repossessed a home.

“Unlike many of the states here [in the US], if you get foreclosed out of a home, you don’t lose the debt, you’re still on the hook for the debt In many, many of the American states, you can just put the keys back to the bank and you’re off the hook,” he said.

Mr Ross said that, while there have not been many foreclosures in Ireland, there have been high levels of arrears.

“We can be very useful to the country, coming into it at a properly mark-to-market level; we’ll be able to give the people a lot of relief on the mortgages, and yet be able to make the bank function well because of the level at which we’ll be coming in,” he said.

Mr Ross said his firm could apply what it has learned about US mortgages in Ireland if it successfully takes over what he called on CNBC the “Educational Bank”.

“The big thing we’ve learned in this country: you’ve got to cut the principal amount. If a guy has got a mortgage 125 per cent of the value of the house, the chances of that guy really playing are very slim, ’cause they’re under water; no one wants to throw money into a rat hole,” he said.

Mr Ross, who made his fortune rescuing troubled financial institutions, said he expects the sale process for the EBS to be concluded by the end of next week and that he was “optimistic” that Cardinal’s bid would be successful.

It is expected that the outcome on the future of the lender may not be known until next month.

As The Irish Times first reported last week, Mr Ross’s New York-based private equity firm, WL Ross, is the third member of a consortium led by Dublin-based Cardinal, which is controlled by businessmen Nick Corcoran and Nigel McDermott and backed by US private equity giant Carlyle.

The three other bidders for the institution are Irish Life Permanent, UK-based Doughty Hanson, and US buyout firm JC Flowers, founded by former Goldman Sachs executive Chris Flowers.

Mr Ross said the company was also looking at other opportunities in the Irish market, and that he had visited Ireland recently.

“We do think there’s room for consolidation in the Irish market,” he said. “There is a need for another very large bank to compete” with the country’s two largest banks [Allied Irish Banks and Bank of Ireland], he said.

He said it was “important to have professional outside investors” entering the Irish lending market with capital.

EBS, which is in full State ownership, requires a further €437 million to meet the Financial Regulator’s €875 million capital target.

The Government has injected €350 million into EBS – €100 million in cash and €250 million by way of a promissory note last June – and will invest the remaining €437 million if the lender cannot source this from private investors.

The society also made a €88 million gain by buying back debt.

Irish Life & Permanent’s (IL&P) bad debt estimates assume that the fall in Irish house prices will be confined to 40 per cent, even though a leading credit rating agency is already assuming a 45 per cent decline.

Commenting on its banking operation in its half-year results earlier this month, IL&P said that ‘‘the key assumption used in the group’s provisioning models and methodology, constructed in conjunction with Oliver Wyman, is house prices. The group’s assumption is that house prices fall 40 per cent peak to trough.”

Oliver Wyman is an international risk management consultancy which is part of the Marsh and McLennan group.

It is best known in Ireland as the consultancy which named Anglo Irish Bank as the best bank in the world at the 2007 World Economic Forum in Davos, Switzerland.

IL&P’s assumptions seem optimistic compared with those of international credit rating agency Fitch, which last month announced that it now ‘‘expects a peak-to-trough house price decline in Ireland of 45 per cent, and anticipates that this will ultimately lead to high loss severities’’.

IL&P said that credit quality and impairments were critical issues for the group’s banking business. It said the number of accounts in arrears greater than 90 days at the end of June in its Irish residential mortgage book increased to 5.2 per cent of the portfolio, compared with 3.9 per cent for the comparable period the previous year.

HOUSE prices in city suburbs could see a modest growth next year.

Head of residential property at Savills Ronan O’Driscoll said the most active sector of the housing market is the realistically priced three- and four-bedroom family houses in traditional, established city suburbs.

He said for houses in this category there is “clearly an undersupply of suitable houses and plenty of mortgage-approved buyers”.

“A return to price growth, assuming no more catastrophic economic events take place, is within sight for the right locations, particularly in the cities.

“In some limited cases, a return to competitive bidding is taking place and modest price growth is likely as soon as 2011 for houses in these locations,” he said.

Mr O’Driscoll said activity levels for rural houses, apartments, holiday homes and trophy Celtic Tiger mansions continue to be weak with downward pressure on prices continuing.

“Predicting when house prices will eventually rise is difficult, particularly as we are so heavily reliant on an active mortgage market which no longer exists.

“However, we have seen a significant increase in the level of activity and we are selling more houses this year than we have for the past two years,” he said.

Mr O’Driscoll said evidence over the past quarter illustrates that prices in some sectors have stabilised and builders who have dramatically reduced prices are generating sales in good volumes.

Director of the Irish mortgage corporation, Frank Conway said he is finding the mortgage situation is no longer getting worse and levels of enquiries are steady. “There is a consistent level of interest in how much borrowers can actually borrow based on their current earnings. The big challenge of course is the state of the overall market. Many consumers that we have engaged with for their mortgage want to move on and buy their first home. However, they are loath to buy when there is a big risk that prices may continue to moderate.

“Everyone is looking for signs that the property market has stabilised and no one wants to overpay for their home so it is a game of cat and mouse at the moment.”

He said there is a real need for a national house sales transaction index, adding one is “sorely needed” to measure what is a major aspect of economic activity.

TALKING PROPERTY: THESE days we don’t hear a peep of complaint from first-time buyers. They are now top of the heap: property prices have plummeted and they appear to be the only sector of the mortgage market managing to extract a loan from the banks.

The pyramid which was the Irish property market has been turned upside down and is now balancing precariously on the jagged remains of its once pointed head.

Historically, the property pyramid was a solid structure with a wide base consisting of low-income earners and first-time buyers, gradually narrowing to the tiny number of super-wealthy individuals positioned at the top.

Most of us had a fair idea which level of the property pyramid we were on.

Some struggled to stay where they were, others were happy with their situation and many, during the boom times, grabbed every opportunity to climb higher, aiming for the pinnacle.

In the early days of the recession, when those on the sharp pointed top of the pyramid were dramatically knocked off their perch, few cared.

Many believed the super-wealthy property investors could afford the hit and had squirrelled away much of their wealth in offshore accounts.

The media (myself included) laughed at their misfortune and expressed little sympathy regarding their demise.

The figures bandied about were so vast that they were beyond most people’s comprehension. Behind the glee at their fall, many secretly admired their nerve.

Soon, however, the ripple effect began to register. Those at the top of the property pyramid employed, either directly or indirectly, many of those on the lower layers of the structure.

As the pyramid crumbled and dole queues grew to include solicitors, architects, estate agents, builders, quantity surveyors, interior designers, manufacturers, retailers and myriad other related professions, it dawned on the nation just how much we all relied on the construction industry.

We watched the structure disintegrate and topple sideways, but were told we would all survive if we ‘took the pain’ and accepted ‘the new reality’.

Two years on, with more pain coming down the line and no sense of any sort of reality, let alone a new one, we now realise that the pyramid has, of late, completely turned on its head. Inverted, it is now top-heavy and structurally unstable.

According to the latest mortgage market report from the Irish Banking Federation and PricewaterhouseCoopers, there has been a drop in lending of almost 40 per cent compared with the same period last year.

Only 7,800 new mortgages were issued in the second quarter of 2010, with a total value of €1.31 billion.

First-time buyers account for 38 per cent of the loans drawn down during this period and represent the largest segment of the much reduced mortgage market, with an average first-time borrowing of less than €200,000.

Many of these first-time buyers work for state or semi-state organisations or have a secure job contract.

Others, however, work for formerly safe public sector companies which now admit that they’ve been struggling to stay afloat for the last few years and are on their last legs.

Last weekend, I spoke with a couple whose company will shortly have to cease trading.

They have already invested almost all of their personal savings into the business, in the vain hope of keeping their heads above water, but must now admit defeat.

In order to save themselves, they must close down their business, which they’ve been running for nearly 30 years, and let their staff go.

This upsets them greatly, as they are acutely aware of the fact that their staff have families and mortgages and are unlikely to find another job.

They were refused medium-term support from their bank – and told to raise money by selling their family home.

This, however, is easier said than done, as their home is a rambling old country house, an hour’s drive from Dublin.Their estate agent has told them the chances of finding a buyer are slim right now.

“It’s all a farce. Without working capital we’ll go down the tubes and we’ll drag at least five other families down with us. The banks don’t give a damn and the Government is oblivious.”

Perhaps it is now time for banks to adopt a more holistic approach to lending – and it is certainly time the Government took its nose out of the Anglo trough and started to examine the bigger picture.

There is little point in banks lending to first-time buyers if, at the same time, they are pulling the rug out from under everyone else.

A stable structure is required, now more than ever before – and it may be worth remembering that the Pyramids are still standing.

The banks’ forbearance to customers in arrears may be storing up future trouble as household debt spirals writes Jon Ihle

The banking system is desperately trying to hold back an ever-rising tide of overdue mortgages as high unemployment and increasing mortgage rates play havoc with family finances. Lenders have been ordered by the Financial Regulator to help people stay in their homes, even when they’ve stopped paying their loans, but how much forbearance can our weak financial system take before buckling?

More than one in 10 borrowers is now in distress, according to the latest quarterly figures on residential mortgage arrears from the Financial Regulator and unofficial estimates by the Irish Banking Federation (IBF).

Around 36,000 households are now more than 90 days in arrears, with two-thirds of that total more than six months behind on their mortgages, according to the regulator.

The IBF is preparing new data on restructured mortgages – loans switched to easier repayment arrangements – showing about 35,000 homeowners in distress but not picked up in the regulator’s figures.

Banking sources also estimate another 30,000 or so have missed payments, but haven’t yet crossed the 90-day threshold. That puts about 100,000 borrowers out of 790,000 in the troubled category.

The trend is ominous, too. In the last year, 90-day-plus arrears counted in the regulator’s surveys have gone from 3.3% to 4.6% of the total. In value terms, mortgages in arrears account for 5.9% of the total outstanding debt compared with 4.5% at the start of the year. Arrears balances stand at €559m, or 8% of those mortgages which are in arrears, according to calculations by Davy.

Yet the banks are doing very little to recoup the money they are losing on souring home loans because the Code for Conduct on Mortgage Arrears prevents them from moving on homeowners who cannot afford to pay. Repossessions have actually fallen in each of the last three quarters.

And the code is set to get tougher if proposals put forward by the regulator over the summer are fully implemented.

“The latest figures from the Financial Regulator confirm that the focus of mainstream lenders remains firmly on forbearance and this is helping homeowners to manage their arrears and to stay in their homes” said Pat Farrell, chief executive of the Irish Banking Federation, in a statement last week.

“IBF mainstream lenders remain committed to doing everything possible to help people with genuine repayment problems.”

But the banks’ commitment could cost them dearly in terms of bad-debt charges and shrinking margins in the coming years, as arrears are unlikely to peak until after unemployment starts coming down. With the jobless figure holding steady at nearly 14%, according to live register figures published last week, that peak could be a long way off.

“Arrears levels are likely to rise further from here,” said Emer Lang, banking analyst with Davy. “[Irish Life & Permanent] reports that early arrears are rising ‘more slowly’ and is signalling a peak in its arrears at the end of the current year. From a provisioning perspective, the Irish policy of forbearance will elongate the tail of mortgage losses this time around.”

While losses for the banks will keep mounting in a ‘long tail’ scenario, the market is already showing signs that borrowers are building big mountains of debt as a result of forebearance – the balances grow as missed payments pile up and get added to the principal.

“While those in arrears between three and six months grew by 10%, their average level of arrears grew by a massive 44%, from €50m to €72m,” said Ronan O’Driscoll, director with Savills Ireland, the real estate services firm.

“This indicates that long-term arrears are a growing problem, with few appearing to recover or escape from the debt once they fall into arrears.”

With just 387 repossessions completed in the last year – or slightly more than 1% of distress loans recovered through asset forfeiture – the banks are mopping up very little of the problem, raising concerns that forbearance is only delaying the recovery as the lenders preserve their balance sheets and try to restore their public image.

“How is it that arrears are going up 11% per quarter but we are repossessing fewer houses?” said Karl Deeter, operations manager with Irish Mortgage Brokers. “This isn’t a public service. It’s political pressure and the realisation by the banks that they don’t want to do repossessions for their own good.”

A bank does not take a full writedown on a restructured loan or a loan in forbearance, but will take a haircut based on probable loan recovery. With a repossession, however, the bank has to account for the value of the underlying property, which could be worth much less than even a discounted loan.

“This has a number of knock-on effects,” he said. “We are not actually dealing with the situation, which kills the property market because we’re not finding a clearing price [on houses]. The quicker you reach the bottom, the better it ends.”

The regulator’s code, however, militates against finding this bottom, as the procedures it puts in place for banks to deal with arrears extends the moratorium on legal action potentially to several years. Each bank now has to have a ‘mortgage arrears resolution process’ (Marp) for dealing with distressed borrowers. As long as a borrower is engaged in the process, their property cannot be touched. But nobody yet know what to do when forbearance simply doesn’t work.

“Forbearance is manageable at the moment,” said a senior banking source. “But some people will still be unable to deal with the problem. We still need a process to work that out.”

There is a concern that forbearance, then, just stores up more serious problems for borrowers and banks alike, ultimately forcing larger writedowns and defaults in the future.

“Borrowers in arrears will get to a point where they just can’t pay what they owe,” said one senior bank analyst at a Dublin securities firm. “At some stage you have to make a decision. We’re not there yet, but in one or two years you could be looking at ‘my Nama’ for mortgages.”

Experts are divided on when interest rates may rise, but if you decide to go for a fixed-rate mortgage, you need to act quickly, writes Emma Kennedy

The decision on whether to f ix your mortgage interest rate now depends on your long-term view of interest rates themselves. Future moves in mortgage interest rates will be governed by two events - the actions of retail banks and those of the European Central Bank.

Retail banks have already shown their inclination to rebuild their balance sheets with their customers’ money, with standard variable rates inching upwards in recent months, despite ECB rates remaining at record lows.

‘‘Now that lenders have taken to increasing the cost of finance on standard variable rates, the best move is definitely to fix,” said Frank Conway, director of Irish Mortgage Corporation.

‘‘Banks have taken back control of their cost of operations, and will do all they can to survive. The financial risk to borrowers with a standard variable rate cannot be overstated.”

Banks are likely to continue with the trend in rate hikes, citing increased funding costs as their justification, but they will definitely hike again once the ECB puts up rates.

When that day will come is unclear. ECB president Jean Claude Trichet last week announced that interest rates would remain at a record low of 1 per cent, for now.

Trichet said the ECB expected ‘‘price developments to remain moderate’’, adding that recovery should proceed at a moderate pace, with ‘‘uncertainty still prevailing’’.

Commentators agree little movement is likely from the ECB before 2011,but the timing and magnitude of subsequent ECB interest rate decisions does not attract similar consensus.

Jim Power, chief economist at Friends First, said Europe’s core, led by Germany, was doing quite well, while other European economies, such as Spain, Portugal, Greece and Ireland, were struggling. ‘‘The ECB has to set interest rates for the whole euro area, so it will undoubtedly have some concerns about the strong momentum in the German economy and the potential for higher inflation,” he said.

‘‘Despite the ECB’s upward revision to growth prospects for the Euro area, the reality is that around 20 per cent of the region will experience tough economic times over the coming year and that should dampen any enthusiasm the ECB might have to increase official interest rates any time soon.

‘‘Also, inflation remains very well-behaved, so there is no immediate pressure on the ECB to take official rates higher.”

Power said it was hard to see the ECB hiking official rates until the second quarter of next year, but said the risk would ‘‘probably increase as 2011 progresses’’.

Ronnie O’Toole, chief economist of National Irish Bank, said he thought the ECB would keep interest rates on hold until the final quarter of 2011, adding that increases would be slow when they came. He predicted an initial increase of 0.25 per cent. Some see the increase coming earlier.

‘‘Our base case is for the first hike to come in June of next year,” said Simon Barry, chief economist at Ulster Bank. He predicted that ECB rates would hit 1.75 per cent by the end of 2011, with three rate hikes of 0.25 per cent each.

‘‘This scenario envisages a gradual process of getting rates back up towards normal levels,” Barry said.

However, he added that his predictions depended on economic performance in the intervening months. ‘’Recovery is by no means copper-fastened and downside risks from the United States and global economies have certainly increased lately. If such risks materialise and the euro zone economic recovery falters, we could well see a scenario where ECB rates are unchanged for all of next year.”

For borrowers who do decide to fix, the advice from experts is to act quickly. Rachel Doyle, director of mortgage services with broker group PIBA, said that while media attention had focused on rising standard variable rates, fixed rates had also been creeping upwards in recent months.

Doyle said that borrowers who intended to fix should consider a longer-term fixed rate, such as five years.

‘‘If you go for a shorter term, such as two or three years, you could end up coming out of the fixed rate at the wrong time,” she said, adding that interest rates could still be rising in two or three years’ time. She said rates would more likely have stabilised within five years.

According to Doyle, Irish borrowers are less likely to fix than their European counterparts, meaning mortgage holders here are more vulnerable to rising interest rates.

Falling property prices are encouraging investors to consider coming back into the market but buyers should look hard before they leap

WITH TWO-BED apartments now for sale in Dublin’s city centre for as little as €140,000, for those not languishing in negative equity or crippled by salary cuts, the possibility of property investing is once again coming to the fore.

Indeed a recent survey indicated that a third of people would now consider investing in property, although statistics show that while many people may be considering dipping their toes into the investment waters, few are actually doing so. In the second quarter of 2010 for example, investment property mortgages represented just 3.5 per cent of total mortgage lending according to IBF/PwC statistics, down from about 20 per cent in 2008, with just 284 investment mortgages drawn down.

While caution is obviously playing a part in the lack of investment decisions, the difficulties in obtaining finance in the current environment is also a factor. According to Karl Deeter, operations director with Irish Mortgage Brokers, it is now “incredibly difficult to get an investment mortgage”.

So what do you need to know before you make that leap?

1 DON’T COUNT ON CHEAP CREDIT

While interest rates in Europe are stuck for the time being at 1 per cent, new buy-to-let investors should not expect to get credit at anywhere near this rate, with banks having shifted rates upward repeatedly since the property bubble first burst. Back in the boom years, investors could expect to get tracker mortgages of about ECB +1.35 per cent, but the differential between residential lending rates and investment rates, has since widened considerably.

According to Frank Conway, a director with Irish Mortgage Corporation, in the past investors could expect a difference of about 30 basis points between residential and investment mortgages, but this is now as high as 150-200, with investment rates now well over 4 per cent. As Bank of Ireland’ recent 0.45 per cent increase in its investment rates demonstrated, these rates might continue to rise.

2 NOT EVERY BANK IS IN THE MARKET FOR MORTGAGES

If you have previously invested in property, you may recall the eagerness with which banks knocked on your door, delighted to lend you money. Much has changed since the boom years however and many lending institutions, such as Permanent TSB, are now simply excusing themselves from lending to property investors. Even those who are lending are extremely selective.

“Even when they have criteria, in practice they are finding ways not to lend,” says Deeter, highlighting the case of a recent client whose mortgage application was refused on the grounds that he had saved his deposit in a current account rather than a specific savings account.

3 DON’T BE IN A HURRY

The days of calling your bank manager to get a fast-track loan approval are long gone, and according to Deeter, approvals are now taking two weeks on average.

“It’s become harder over time to get the same thing done,” he says.

4 YOU’LL NEED A SIZEABLE DEPOSIT

With the days of 100 per cent mortgages long gone, investors are now required to come up with significant down-payments towards the cost of properties. In general, you should expect to have a deposit of at least 25 per cent of the overall price. So, for a €200,000 property, you will need a lump-sum of €37,500. However, according to Deeter, it is only the “very strong applicants” who are getting LTVs of 75 per cent.

“Someone who could afford the property even if it wasn’t rented – that’s the kind of person who is getting a mortgage at the moment,” he says. Otherwise, you will be looking at getting funding of only 50 per cent.

Banks have also gotten stricter with regards to valuations. Irish Nationwide for example, requires a new valuation report if the existing report is older than six months.

5 STRESS TESTS ARE ESSENTIAL

With interest rates “only going one way”, Deeter recommends that investors stress test their repayments at rates of up to 7 per cent. So for a €250,000 mortgage, you should have about €1,700 a month to hand.

6 PROPERTY MAY BE CHEAPER – BUT FINANCING IT ISN’T

While property prices may have fallen by as much as 50 per cent, the increase in the costs of financing means that a property purchase may not offer as much value as it first appears.

“Banks are essentially capturing any value in the market,” notes Deeter. For example, if you were to purchase a €400,000 property three years ago on a 2 per cent tracker rate over 30 years, you would have been looking at repayments of about €1,478 a month.

Now you may be able to buy that same property for €300,000 but on a 4.2 per cent rate, your repayments will be €1,467, so the property has actually only become €11 cheaper a month “You need to look at property from a cash flow, rather than capital appreciation, perspective,” advises Deeter.

7 RELEASING EQUITY MAY NO LONGER BE AN OPTION

With thousands of properties purchased all over the world, from the waterways of Leitrim to Dubai’s “World” project, on the back of equity which had been built up in residential properties in Ireland, refinancing your mortgage to facilitate the purchase of another property was once very much the done thing.

Not any more, however. With thousands of homeowners stuck in negative equity, many will find they have no value built up in their home which they can release to fund a new purchase. For those who can, the changed banking environment may mean that refinancing isn’t an option. “Banks mightn’t be too interested because you’re just borrowing the deposit,” notes Deeter.

In years gone by, a common technique to bring down the cost of financing used by property investors who no longer had outstanding mortgages on their own home, was to take out a new mortgage, at a cheaper residential rate, and use this cash to purchase an investment property. However, “no-one will do that now,” notes Deeter.

8 INTEREST ONLY IS FOR A LIMITED PERIOD

With only the most credit worthy of investors getting mortgages, interest only is “almost a no go area at the moment” notes Conway. “You have to be able to show you can pay off capital and interest,” he says.

If you do manage to secure an interest-only loan, remember that it is only designed to last for a specified time-scale, as investors with Permanent TSB are now discovering.

The bank is looking to move investors off interest only to full repayment loans, which is placing many investors under severe financial pressure as they are not making enough rent to cover the new repayments.

“Someone who could afford the property even if it wasn’t rented – that’s the kind of person who is getting a mortgage at the moment. Otherwise, you will be looking at getting funding of only 50 per cent.