New Mortgages = Zero + Noise, Forecast and Outcome

Six months ago on this blog I made a quasi-prediction that the number of new residential mortgages in Ireland might shrink to zero-plus-noise. Arguably this has now happened. I claim no great insight and concede that it might have been dumb luck. My quasi-prediction was based on some informal liquidity-risk analysis of the Irish banks. The banks are in a corner solution with respect to long-term illiquid assets. There is little good reason for an Irish-domiciled bank to issue a new residential mortgage, rather, they might be keen to sell any of their existing long-term illiquid assets at a loss. This has only second-order policy importance relative to Greece, etc., but is worth documenting.

21 replies on “New Mortgages = Zero + Noise, Forecast and Outcome”

Growth in the economy is very much dependant on the housing Market. This is because new money is created every time a bank processes a mortgage. New debt is also created and indeed, we see this as the source of our debt problems.

Mortgages introduce large sums of new money to the economy with gradual repayments so under the current system they are important.

This report shows that we can no longer expect mortgages to be an adequate source of nee money for the economy. At some point we’re going to have to start discussing the idea that Central Banks should provide a source of digital money for their Governments.

Growth in the economy is very much dependent on growth in mortgages. This because bank’s create money every time they process a mortgage. Of course they create a matching debt also. Indeed, we see this as the source of many of our problems.

Mortgages introduce large quantities of new money to the economy with gradual repayments but as this report shows we can no longer expect mortgages to be a sufficient source of money.

At some point we’ll have to discuss the possibility of Central Banks creating both cash and digital money for their Governments.

It will interesting to see just how low mortgage lending can go considering the capital injected by the trioka for write downs/defaults is still in the banks. Eventually these losses will have to realised. No doubt the capacity to lend has been prioritised over the need for dealing with the default cliff.

My bet is that mortgage lending will eventually stop during the high point of dealing with defaults – happy days for the prudent amongst us!

Any return to a reliance on any system that increases the housing stock and the population, with ‘real’ activity being sidelined as something that will somehow materialise as a result, will surely – perhaps after a temp. respite – just leave us in a deeper hole down the road, no ?
Job creation never matched immigration, and welfare-reliance seems to have been something that was tolerated as it could nonetheless be used to stoke the construction bubble.
Surely we’d be better off creating some system of controls on property prices & taking it out of the unregulated market ?

@Gregory Connor

Firstly, thank you for drawing attention to the data posted by Namawinelake. An excellent analysis.

The results are appalling. Proof positive that the role of Irish banks is now one of debt collection and extraction of capital from Ireland.
A four year government policy of support the banks at all costs and €65 billion support and this is the result.

Your original argument was based on the what the short term variable rate should be:
“Fair rate on a variable rate mortgage = short-term bank funding cost + cost of 30-year commitment to continued funding.”

And you further qualified this with the following:
“The ECB does provide “emergency liquidity” to banks, and accepts mortgage assets as collateral. However it has made clear that this is a short-term emergency measure, and subject to sudden withdrawal at its whim. So, for example, the ECB has made clear that if the Irish government does not stick with the agreed programme (such as by not paying back fully on private sector bank bonds) liquidity support for Irish banks will be withdrawn at short notice. So the Irish banks have plentiful ECB liquidity support over the immediate term, but it is a very risky and unreliable long-term funding source.”

The substance of the argument is that whatever model for pricing mortgages is used, it is trumped by the stance of the ECB. Its stance to provide:
1. Short term liquidity support (though this has changed slightly).
2. Its conditionality of program adherence.
3. Its public threats to implode the banking systems of countries.

Well it appears that they have achieved their objective in Ireland. The banks have been turned into debt collecting agencies. There is no new funding other than banks converting overdrafts to term loans and calling it new funding. Anecdotally this is what has been happening for the past few years.

I would argue that it is further trumped by the deleveraging agenda mandated by the Troika. In fact I believe that this deleveraging is far more harmful than any ‘austerity’. If I am not mistaken it was the withdrawal of credit that significantly exacerbated the Great Depression in the US.

One way or another the conclusions are obvious.
The banks are acting in their own (executive ) interests.
They are nor even making a pretence to act in the interests of the economy by making mortgages available.
Unless deleveraging is stopped and reversed we are headed for disaster.

As I work in private industry, My own experience is that the first quarter of the year was not good but there was a significant downturn throughout in April throughout what is left of the building / refurbishment business.

I would also argue that the ECB is 100% wrong in attempting to get back to ‘normal interbank funding’. The interbank lending model is fully broken and will not recover for many years, if ever. We would be better off without the ‘interbank funding model’.
The idea that economies can rely for their future on ephemeral funding that can disappear overnight is nonsense.

It would be instructive to know what the lending criteria are for residential property mortgage lending. Yield? A mulitple of nett/gross salary? Size of cas deposit? Nature of employment? Location (inner-urb/ sub-urb/ outer-urb or rural)? Properties are being sold – but at a slow pace. So how are the mortgages being allocated?

The other ‘shoe’ is of course the potential borrower. Maybe a lot of folk are just holding back until 2015. We should (I hope) have a better informed situation by then.

House sales that I know of (having fallen from a peak of c.440k€), with an asking price of 170 – 190k, are transacting for 160-70.
Presumably the banks are carefully matching their mortgages to a future price projection a lot safer than their old models….

By the way, has anything more come of the warnings that the type of problems associated with Priory Hall were juct the tip of the iceberg ?
If correct, it would be interesting to know if those owners of any of these properties attempting to sell (which can in the main be presumed to consist of banks/distressed landlords) have initiated any scrutiny into their property’s integrity. There should additionally be new assessments made of properties left empty & unheated for protracted periods, especially with regard to the winters 09/10 & 10/11. Poorly built modern buildings – which is pretty much everything built in Ireland since the sixties – deteriorate faster than old cottages & farmhouses when left empty. There could be a lot more than mortgage arrears for the banks to factor in to their assets.

The current series of official statistics are from 1970 and the annualised quarterly performance in 2012 is 16% below the level in 1970 – – back possibly 45 years, into the 1960s.

Joseph Ryan makes some pertinent points.

As regards the ECB, it’s unlikely that more than 3-year loans will be on offer.

On local lending, there is an emergency but the people making decisions or not and their advisers are from the upper middle class, generally with well-padded public safety nets and they would have been marginally impacted by the crash.

The public representatives on the boards of the banks are in the same boat: BoI: Tom Considine, ex-SG Dept of Finance; Joe Walsh (former minister). AIB: Michael Somers (ex-NTMA), Declan Collier (ex-DAA) and Dick Spring (former minister). Anglo: Dukes (former minister) and so on.

The ‘people of standing’ in the media and academia may seek to hold them accountable but feeling the pain of those struggling at a personal level or trying to keep a business afloat would be more theoretical than real.

When ministers seek external advice, it has to come from the big name firms who have coined it in boom and bust. As the Gordon Gekko character says in the ‘Wall Street’ sequel: “If you’re not inside, you’re outside, okay?”

The banks have centralised most credit decisions and there is a public Credit Review Office to seek explanations on credit refusals.

While banks have to have the final word on credit decisions, the minister can send his own staff into bank hqs to ensure that where possible that lending is consistent with public policy.

An example at government level of the ‘business as usual’ crony approach is the rehiring of people who were induced to retire early.

Minister Brendan Howlin admitted there is no central record of the retired staff being brought back in to work for state bodies — or why they are being rehired.

Minister Burton has appointed two retired gardai to the Pensions Board at rates of up to €80,678; six ex-staff at the Department of Jobs, Enterprise and Innovation were rehired, including two who are civilian drivers on a wage of €631.75 per week. Gilmore has rehired seven former senior officials on contracts ranging in length up to three years and so on.

All rocket scientists no doubt and unemployed managers, graduates or school leavers could not fill any of these jobs.

Of course they could but from inside the bubble, the life beyond is surely a bit distant…but for how long?

Is the flip side to this ‘bad’ news not a positive, in that the economy is just about stabilising despite the huge contraction in credit and deleveraging of household, sovereign and business balance sheets? Not quite going to suggest the economy will take off like a rocket ala Noonan, but it still suggests that the economy is well placed to take advantage of any return to an even mildly ‘normal’ (whatever that is) banking and credit system? The problem is obviously when, or indeed if, that return to normality will occur.

Buying Irish government bonds on the secondary market might have better yields than issuing new mortgages. Will Irish banks max up on their Irish government exposure before lending to the ‘real’ economy?

How can anyone say what the correct price for a house is? Negative equity prevents a large number of people from selling. NAMA has loads of properties that it could dump on the market at any time. There are questions about construction quality for some unknown number of houses built during the boom. Irish bankruptcy law is completely unbalanced to the point that people are now offering classes on how to become resident in the UK and declare bankruptcy there. And we still don’t have a decent source of housing price data.

All of these create uncertainty in the housing market. If you can’t value an asset, how can you invest in that asset (which is essentially what a bank is doing).

The best way to assess the sustainable value of residential property is to extrapolate from people’s income. But we’ve been pursuing a policy of driving down wages and reducing the number of workers employed by the state (and in a knock on effect, the private sector). So pretty much all signs point to house prices going down.

Who in their right mind invests in an asset that will reduce in value? Borrower or lender?

If mortgage approvals are going down (and I still haven’t seen data saying that the ratio of mortgage approvals to mortgage requests is going down), that’s a sign that Irish banks are behaving correctly.

Fantastic chart , and it only goes to 2008…….

You can clearly see the step change in the system post 87 /88 as it went from a more tradional 8 to 1 leverage to a situation where almost all our savings were loans to banks and not the token chips of the state. (40 to 1 +)

I fear Paul Ferguson ideas will not be taken up given the leverage power the present money system has over us all.
The guys who truely know how the system operates are running a intensely feudal type operation and are laughing all the way to their bank.

Unless we follow Pauls flaws in Peels bank act type model then eliminating the defecit under this fiscal thingy will grossly improvish people as imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens! as they cannot even hold much of the company tokens.

Which I fear is the agenda of the people behind the curtain….. who perhaps wish to exploit a New Saudi Arabian like oil ration on these now non sovergin shores (15MBD – 10 MBD = 5MBD remaining)
And gift this bounty to China at our expense.

Some of us try to game this corrupt system by holding Gold , US treasuries etc etc etc but we cannot win long term.
These guys were instrumental in creating the FED in 1913 then in 1914………European Gold was transfered to the new superpower to pay for the Great war.

The Euro creation in 1999 was also folowed by a period of their turmoil , with 9/11 following soon after.
These guys will hold all the money cards soon , if they have not got them already.
We are now looking forward to a era of mass slavery – it seems the Great lidless eye has won all the battles.

“There is no economic activity in the void only debt”

All our economic woes originated from one single house–Leinster House.


How many school leavers and graduates enter the potential workforce annually? Without emigration, or ‘tourism’ as Noonan calls it, the numbers seeking work would balloon. At a certain point in time all those migrating from degree to masters to phd and so on will have to find work.

I am not an economist but it seems logical that with Europe in recession, and the global economy slowing, emigration will become a less serviceable safety valve. Consequently, unemployment will increase in Ireland in the coming years. And I can’t see the banks opening up for credit in those circumstances.

Call it catch 22 or a chicken and egg problem, but without credit there won’t be much by way of growth in the indigenous sector.

The MNCs are bringing in jobs, but how many job announcements are simply recycled earlier press releases? It seems to me that to a very large extent, Ireland is back in the early 80s very heavily reliant on FDI and it is far from clear that MNCs will create enough employment to get ‘growth’ off the ground.

Moreover, unlike the 80s the country has conducted a twenty year experiment in grounding growth in the expensive production of human capital, and with the exception of a few lottery winners it hasn’t delivered – in itself that outcome could never unseat an Official policy which has so much blather and spin behind it.

The government has done little on credit for SMEs, modernising personal insolvency legislation, and mortgage debt relief. Why? Fear of offending the banks, or is it simply that ministers and their set have no need to consider such matters since they’ll never be troubled by their implications?

‘THE spiralling mortgages crisis could trigger another multi-billion recapitalisation of our banks and force Ireland into a ‘second bailout’, German banking giant Deutsche claimed yesterday.

The damning 120-page note from Deutsche came on the same day that Citi warned that the recession was likely to force Ireland to apply for a second bailout. London-based Citi also pointed out, however, that they expect a second European bailout to remain available to Ireland even if the fiscal compact treaty fails.’

Mark: So you mean the earlier post with the flow charts and 12 month budget cutting binge because we wouldn’t have access to funding was… wrong?

I’m shocked.

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