Ireland Financial News – Mortgages & Banking

 Bank of Ireland and AIB Group have agreed to delay issuing repossession orders on homes for 12 months as part of the Government recapitalisation plan.

The banks have told Government that delaying repossession proceedings for those in arrears on their mortgages for any longer would be viewed negatively by investors.

The issue of mortgage arrears has become more central in the €7bn recapitalisation talks because of rising unemployment levels.

Negotiations continue today and any final agreement may be extended as part of a new regulatory code covering mortgage arrears for the entire home loan sector.

The fine detail of the plan is now expected after markets close on Wednesday evening or early Thursday.

The Government had wanted delays in repossession proceedings for two years compared to the current six-month rule.

However, banks raise new funds by issuing bonds against using their mortgage books as security. The banks pay interest on those borrowings.

Carrying mortgage arrears for up to 24 months would make the quality of mortgage-backed securities less attractive to international investors.

It now appears banks are offering not to pursue mortgage arrears for six months and have offered not to repossess homes until 12 months has elapsed.

The compromise has regard to the distressed financial situation arising for many losing their jobs.

Other talking points have centred on executive pay.

Future bad debts

Meanwhile, it appears a firm Government guarantee of AIB and Bank of Ireland’s exposure to future bad debts on property development loans is unlikely at this juncture.

The €7bn injection may not be enough to cover future bad debts arising in the property sector, and markets are sensitive to this weakness.

Fine Gael says the Government’s bank recapitalisation plans may leave taxpayers dangerously exposed to massive bad debts.

In a statement, the party’s finance spokesman Richard Bruton said the Government should urgently consider other options, including the creation of ‘good banks’ with clean balance sheets.

Mr Bruton said Fine Gael has huge concerns that the taxpayer is being asked to put money into existing banks without knowing the full extent of the hole in their balance sheet.

He said there was a real risk that the only result will be to allow the banks to nurse along their dodgy property lending while continuing to starve viable businesses of access to the credit
they so badly need.

Fine Gael Leader Enda Kenny has said the pay and actions of top banking executives must be reviewed before the Government’s finalises its €7bn recapitalisation plan for Bank of Ireland and AIB.

Speaking on RTÉ Radio’s Morning, Mr Kenny said taxpayers’ money should be carefully employed

Last night, Minister for Finance Brian Lenihan said there was much tougher talking to be done before the Government signs off on the plan.

He said the Government will call the shots and will have a substantial influence.

Minister Lenihan said the Government has a detailed assessment of the banks’ debts but it would observe due diligence before investing in the banks, as any investor would.

Meanwhile, a group of teachers from all three teaching unions, ASTI, INTO and TUI, are to stage a picket at Anglo Irish bank, on St Stephen’s Green this afternoon.

Teachers United says the protest is to highlight the underfunding of the education system, while the banks are being bailed out.

 Houses prices in Ireland fell by 9.1% last year.

The House Price Index, published by the ESRI and Permanent TSB, indicates that the biggest prices drops were in commuter counties surrounding Dublin.

House prices were down 16.8% in these regions in 2008.

  Permanent TSB says houses prices now are where they were in the middle of 2005 and it is thought houses prices in 2009 will fall by a further 10%.

It says the market will not recover until the economic situation in Ireland significantly improves.

David Duffy of the ESRI says that is unlikely to happen until 2010.

The fall in Dublin commuter counties was the largest fall recorded – with houses in Dublin down almost 12% and just over 10% for houses outside Dublin.

The national average house price for first time buyers was down 14% last year; that is more than double the decline seen in 2007.

Niall O’Grady of Permanent TSB says the last two years have seen a rate of decline as high as 17%.

He says that trend is likely to continue for at least the remainder of the year.

The Permanent TSB/ESRI index is based on actual transaction prices and not market valuations and other indicators.

The organisations say it is more reflective of the reality of the housing market.

 The Central Bank says it expects the economy to contract by 4.7% this year, as Ireland continues to be impacted by global recession and falling demand.

In its latest economic forecast, the Central Bank says the contraction will lead to significant job losses with 100,000 fewer people working by the end of the year.

The bank says unpalatable short-term measures are needed if the economy is to stabilise in 2010.

In one of the most negative outlooks published so far, the bank says the contraction in the economy this year will more than cancel out growth the economy enjoyed in the boom year of 2007.

In the housing market, blamed for many of the ills, the Central Bank says completions could fall to as low as 22,000 units this year compared to 52,000 last year, despite their being more affordable.

Last year saw the first drop in employment in many years. The trend is set to accelerate and assuming some emigration, unemployment is likely to average 9.4% of the labour force this year.

However, it believes Ireland has the potential to grow strongly again if productivity can be improved but the potential is not a given and the Central Bank says unpalatable measures are needed.

The bank says the largest item of government expenditure, the public sector pay bill, is ‘beyond the scope of current resources’.

It says the public sector needs to use its purchasing power to drive hard bargains with the services sector.

The central bank suggests reducing tax avoidance schemes and imposing user charges for public services.

It describes Ireland as unusual in not applying an annual residential property tax.

The latest figures from the Central Bank show that weakness in residential mortgage lending persisted in November.The Central Bank says that mortgage lending rose by just €96m in November.

This compares with an average monthly increase of over €850m between January and September of this year.

It also compares with an average monthly increase of almost €2bn at the height of the housing boom in 2006.

The annual rate of increase in residential mortgages slowed to 6.7% last month from 7.6% in October – the lowest annual rate of increase since 1986.

Overall, private sector credit growth slowed to 8.4% in November from a figure of 8.9% the previous month.

The figures from the Central Bank also show that new credit card spending was slightly over €1bn in November, the lowest level since April 2006

The Government has announced support for a recapitalisation programme of up to €10 billion for credit institutions.

In a statement issued this evening, it said its objective was to ensure the long-term sustainability of the banking sector in Ireland.

The Government said it would support the programme alongside existing shareholders and private investors, and would underpin its contribution through the availability of credit to individuals and businesses in the real economy.

After a day of meetings, Minister for Finance Brian Lenihan confirmed that money from the National Pensions Reserve Fund will be used in the recapitalisation programme.

State investment will take the form of preference and/or ordinary shares in the institutions receiving funds.

Mr Lenihan said State investment would be assessed on a case-by-case basis and all the institutions were being asked to submit their proposals by early next month.

A spokesperson for AIB said the bank’s board would discuss the Government announcement when it meets later this week.

 Figures from the Central Bank show a dramatic slump in the growth of residential mortgage lending in October.

The annual rate of growth in October fell to 7.6%, the lowest figure since 1986.

The Central Bank described the mortgage figure as ‘exceptionally weak’.

The amount of money lent for mortgages rose by just €26m during October, compared with the average monthly increase of almost €2bn at the height of the housing boom in 2006.

The US government has agreed to a $306bn (€244bn) rescue plan for Citigroup in the latest attempt to bolster a financial services industry in turmoil.

Citigroup’s package may also prove a template for other banks that are expected to face growing losses as economies worldwide sink into recession.

Credit losses once concentrated in mortgages are already bleeding into new, large areas such as credit cards and commercial real estate.

  The nation’s second-largest bank by assets has the farthest international reach of any US bank, with operations in more than 100 countries.

Many analysts have said Citigroup might be too big to be allowed to fail, and that any collapse could cause financial havoc around the globe.

‘The market wants some kind of certainty about their losses,’ said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.

The plan announced late Sunday calls for Citigroup to obtain $27bn (€21.9bn) of capital by issuing preferred shares.

The shares carry an initial eight percent dividend, higher than the five percent it charges dozens of other lenders under its $700bn (€560bn) financial industry rescue package. Citigroup itself got $25bn (€20bn) in the earlier package.

Citigroup agreed to absorb the first $29bn (€23.2bn) of losses on the $306bn (€244bn) portfolio, plus 10% of additional losses, for a maximum total exposure of $56.7bn (€45bn).

The Treasury Department could end up absorbing $5bn (€4bn), the Federal Deposit Insurance Corp $10bn (€8bn), and the Federal Reserve the rest.

The bank will not have to make management changes, but agreed to tighter restrictions on executive pay, and to try to modify troubled mortgages in the $306bn (€244bn) portfolio.

It also cannot pay more than one cent per share in common stock dividends per quarter for three years without the Treasury Department’s consent. The quarterly dividend is now 16 US cents.

‘The US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,’ the Fed, the Treasury Department and the FDIC said in a joint statement.

The plan was announced less than a week after Pandit announced plans to reduce Citigroup’s workforce to 300,000 by early next year from 375,000 at the end of 2007.

Citigroup employs over 2,200 people in Dublin’s IFSC and in Waterford.

The Minister for Finance, Brian Lenihan has said the Government has not ruled out public investment in Irish banks, but said banks had to demonstrate a capacity to attract private investment.

Speaking on RTE’s this week, Mr Lenihan said the State putting money into the banking system would be a last resort and it was entirely legitimate that the taxpayer should not be asked to capitalise banks.

He said he had received a Government commissioned report confirming there was no threat to the solvency of banks in Ireland and that they could meet the current regulatory capital requirements.

Mr Lenihan also said he was not ruling out income tax increases over the next two years.

News from RTE >>

Official figures show that the annual rate of inflation fell back to 4% last month from 4.3% in September.

The Central Statistics Office said lower petrol and diesel prices and falls in the prices of clothes and footwear were the main factors in the fall.

The CSO said the October figures did not include rises in excise duties announced in the Budget, as they took effect after the figures were compiled.

Overall, prices fell by 0.2% compared with September.

There was a 2% fall in prices of clothes and footwear, while lower oil prices and air fares led to a 1.8% drop in transport costs.

Prices of furnishings and household equipment were also lower due to sales.

But education costs rose by 3.6% in the month, while there were also higher childcare costs and house insurance premiums.

News from RTE >>