Subprime crisis catches up with Irish borrowers
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It may have taken time, but the effects of US subprime crisis are finally being felt at full force in the Irish mortgage market, writes Joe Brennan.
The world has known since February last year that the US subprime mortgage market had turned ugly, as risky borrowers defaulted on homeloans in their thousands amid plunging house prices.
But it's only in recent weeks that borrowers have seen tangible evidence of its effects on the Irish mortgage market, with the sudden rush by lenders to increase rates.
But, then again, the true extent of the fallout has been slow to emerge. After all, it took six months before the banking world realised that it was sitting on a ticking timebomb when a smallish German bank, IKB Deutsche Industriebank, had to be bailed out by the German state because it had invested in US subprime mortgages.
Within days, French banking giant BNP Paribas stopped investors from taking money from three funds that contained subprime because it was not able to "fairly" value them. Banks around the world became suspicious about whether rivals had toxic subprime investments and they stopped lending to each other.
As a result, rates in the inter-bank lending market, which oils the wheels of global finance, shot up. Banks historically lent to each other at extremely low rates, typically between 0.1 and 0.15 percentage points above central bank rates.
But the Euribor rate charged between European banks for three-month loans spiked at 0.95 points above the 4pc ECB last year and is still hovering at around 4.75pc, with global banks having unveiled over $250bn of subprime losses. The final tally could be twice as high.
Up until recently, Irish mortgage lenders continued to vow to take the hit in the chin, though they had long been passing on their higher costs to commercial borrowers and customers with overdrafts and credit cards.
But in an effort to recoup some of their higher costs, Ulster Bank, a unit of Royal Bank of Scotland, broke ranks with other lenders in December and slashed the commission it pays brokers in half -- to 0.5pc. A raft of others followed suit.
UK mortgage lenders were forced months ago to begin increasing rates, whereas Irish banks had been somewhat cushioned. "Firstly, there hasn't been any real demand for mortgages recently. But Irish banks have the luxury of the ECB (European Central Bank) allowing banks in the eurozone to raise fresh cash from it by using mortgages they have in their loan book," said one banker.
Bonds
The Bank of England has only introduced something similar in recent days, where it will allow banks to swap mortgages for government bonds -- which are almost as good as cash.
Still, with the credit crunch lasting much longer than many had hoped, Irish lenders were only buying time before they had to move on rates. Ulster's sister, First Active, became the first Irish lender to increase its rates on new mortgages by up to 0.5pc. It's been followed by Ulster, Bank of Scotland (Ireland) and Permanent TSB.
"It had been very much a cat-and- mouse situation. All lenders want to be the first to be seen to be cutting rates, but nobody wants to be the first to raise," said Emer Lang, an analyst with Davy.
While ECB officials poured cold water this week on hopes of interest rate cut s, the fear is that when they actually start to come down, banks will pass on little or none of the benefits on if inter-bank rates remain high.
