Could a new mutual building society be set up?

[Brendan Burgess]

The original idea of building societies was to provide finance to people to buy their own homes. The building societies lost sight of their original objectives.

The existing lenders can't operate profitably because of two big legacy issues - bad debts and their tracker mortgage book. So they have to charge very high Standard Varibble Mortgage rates.

So why not set up a truly mutual building society which would not have to deal with these legacy issues, which would put customers at the heart of their business?

• Cheap and flexible mortgages
• Possibly link mortgage rates to ECB
• Good deposit rates
• Lending only for the purchase of new homes
• No other products - just home loans - keep it simple
• Very conservative lending criteria e.g. 80% max ltv and three times salary
• Fair treatment of borrowers in trouble

 

[Brendan Burgess]

OK, so what would the balance sheet look like?

Assets

Mortgages|750
Government bonds|250

Funding

Shares |100
Deposits|900
Total funding|1,000

Profit and loss account

Mortgage Interest|750 @4%|30
Bond interest|250@1%|3
Total interest income||33
||
Deposit interest paid|900@3% |27
Share dividend|100@5%|5
Total interest paid||32
Net interest income||1
Admin costs||10
Loss||(9)

This is not enough to pay the admin costs, the costs of bad debts, and to build up reserves to fund growth.

 

[Brendan Burgess]

Who would provide this share capital?
"Founders" of the building society might put up some share capital which they could not withdraw. It could only be repaid at the discretion of the building society who could only do it when the accumulated profits of the society were enough to release such share capital. Such shareholders would need a return of around 5% at least to tempt them. They are more likely to invest in this for society reasons than for profit.

 

[Brendan Burgess]

So what about the Credit Union model?

Most of the "deposits" would actually be shares. No dividend would be paid until the end of the year, based on the profits for the year.

A smaller dividend would be paid for the first few years to build up reserves.

 

[WizardDr]

There is only one B/S left ICS BS and thats about to be shut down or let wither away and there will be a temptation by the Central Bank to get rid of the legislation by converting ICS BS the same way as EBS.

In the UK this is regarded as a viable model.

There are a number of matters:

1. Liquidity - the old model of having deposits or shares withdrawable effectively on demand is a big difficulty.
2. Could have Retail Bond that pays 2% less than the Mortgage it supports - fixed or variable or both; redeems in line with mortgage repayments; not on demand; could be transferred to another - needs more thinking.
3. The margin - 2% - could reduce as B/s gets bigger as a key element would be control of costs
4. Share element would need an element of irrdeemable but transferable.
5. Lending policy clear
6. Rules clear/

Problems:

1. Uninterested Central Bank who see overseas as better - no paddies
2. Start up situation
3. IT systems - outsourcing?
4. Founders - who they?

Last but not least have we lost the fighting spirit? I noticed even on Credit Unions we are letting a deranged Regulator impose a Reserve Ratio THREE times that of Banks.
Nobody has explained that.

 

[Jim2007]

The basic problem with all these ideas are the you are using short term funds to finance long term borrowings... this means every time there is a squeeze you have to be able to borrow from a lender of last resort to cover the short fall or issue bonds of some type!!!

 

[Brendan Burgess]

Some interesting points there. However, the main point I was trying to make was that it would be very difficult to operate a building society profitably at the current mortgage and deposit rates given the particular capital and liquidity requirements.

Profit and loss account

Mortgage Interest|750 @4%|30
Bond interest|250@1%|3
Total interest income||33
||
Deposit interest paid|900@3% |27
Share dividend|100@5%|5
Total interest paid||32
Net interest income||1
Admin costs||10
Loss||(9)

 

[WizardDr]

@brendan

What size society above? If the assets were €1bn v €100m - would that 'quare' admin costs not be important?

- rework with margin 2%
- the bond I mentioned answers the short v long
- the short term placing with Government why 1%?
- whats in Admin for a BS with assets of €1bn

Have you given up already?

Also we need a 'radical' ideas section also a large needle needs to be stuck into people to get this debate going or have they all given up ?

 

[ryaner]

Namawinelake covered something like this at http://namawinelake.wordpress.com/2...-rules-out-intervention-on-state-aid-grounds/ - a bit in jest but the numbers stack up on the back of a napkin

And now is a perfect time for such an entrant to make their entrance. With the imminent creation of the central credit register, the new entrant will be able to judge a customer’s credit-worthiness better than ever before. With Bank of Ireland required to send out letters to customers advising them of the new entrant’s proposition – yes seriously, that was a condition under which the EU approved the state-aid bailout of Bank of Ireland, and others – the new entrant will even see their marketing taken care of.

I reckon the new entrant should be able to pick up at least 100,000 mortgages of say an average of €100,000 each or €10bn in total and if the new entrant charges 3% on standard variable rate mortgages and its cost of funding is 1%, then it has €200m gross profit per year.

 

[Brendan Burgess]

How could you get 1% cost of funding?

You would be relying almost totally on deposits and they would cost around 3%

But that is the main point I am trying to establish. What should the SVR and the deposit rate be in an ordinary market.

Brendan

 

[ryaner]

The 1% cost of funding is based on the LTRO EU funding that is going on. Argument was that a new entrant could (rightly?) be extremely picky about the mortgages they choose meaning they'd likely getting a full allocation against the collateral they provide.

It isn't a long term solution, but it is likely to see the "bank" through to either the markets return to normality, or a comprehensive solution for arrears is put in place.

I don't think any bank can ever be sustainable and have enough deposits to cover its loan book. Biggest problem with normal, on-demand deposits is that they are on-demand.
Then there is also the argument that deposit rates here should be lower than 1%. Much lower. Look at the rates in the US for example.

 

[CharlieR]

Look for bank of Dave in the uk to see the problems he had trying to set one up to challenge the banks.

Shocking how corrupt the system is.

 

[Jim2007]

Biggest problem with normal, on-demand deposits is that they are on-demand.

Exactly and the way we get around it here in Switzerland is to require pension funds to hold a large percentage of their assets in local property - either via long term bonds issued by the lenders or direct investment. That way the funds get guaranteed income streams into the future, while the lenders get access to long term deposits which can be matched to long term borrowing.

At the start of the year, Irish pension funds held about 101b Euros in assets, imaging if say 35% of that was to be held in Irish property.....

 

[ryaner]

At the start of the year, Irish pension funds held about 101b Euros in assets, imaging if say 35% of that was to be held in Irish property.....

We'd have even less pensions than before ...

 

[Jim2007]

We'd have even less pensions than before ...

Ah yes, there would have to be serious pension fund reform, for this to work - they would actually have to take responsibility for paying out pensions! Hence the need for streams of income...

 

[MrEarl]

So what about the Credit Union model? ...

And there rests the answer, in my view.

The Credit Union, in theory, is the last real mutual lender in our country. In practice, overall, Credit Unions do a good job. However, as we are all too aware, some lost the run of themselves.

If it were me, I would merge the majority of Credit Unions (exceptions being those which are in a difficult financial situation) into one large, mutual business. Clear issues would have to be addressed, ranging from controling expenditure at local level, introducing one single IT system etc etc.

However, on the positive side:

1. The network, the customer base & the ethos are already in place

2. The Government would most likely support (politically, if not financially) such a move, not least because it's regulators apparently have concerns about how some of the credit unions are currently being run

3. There is a sizeable deposit / savings base there already, all relatively intact over the last few years and regardless of the fact that annual returns (i.e. dividends on members' shares) have been very low etc.

Regards

Mr. Earl.

 

[Brendan Burgess]

This thread is very relevant in the context of the increase in the AIB interest rate.

I concluded that a gap of 2% was not enough to sustain a new mortgage lender.

Do we have to look at new ways of funding mortgage lending?

Brendan

 

[ronaldo]

This is an interesting thread.

• Is the differential in deposit rates and mortgage rates with AIB/BOI of any relevance when a large part of that difference is related to the subsidising of tracker mortgages?
• Judging by the differential in the UK, and the fact that they are still offering tracker mortgages at BOE+1.88%, is it worth comparing to their system? - possibly not due to their Funding For Lending scheme and lack of a property crash to the extent that we've had
• What is holding UK banks off on becoming mortgage lenders on a large scale in Ireland - is it the crashing prices or is it the difficulty banks have experienced in the past with repossessing homes?
• If, as expected, repossessions are to become more of 'the norm' here, would a UK lender be tempted to enter the market at lower LTV's - even the switcher market?
• I can't see how it wouldn't be economically viable for a UK lender to set-up here at LTV's of, for example, 50% and concentrate on the switcher market. The risk here is minimal - even taking into consideration the more restricted ability to repossess. There are a lot of people in more established homes purchased well before the peak that are stuck on our exorbitant SVR's
• Would the Irish government have a hidden agenda in trying to avoid the changing of laws in a manner that would encourage more foreign banks to set up as mortgage providers here? (given the fact that the majority of the 'good' mortgages in the state owned banks are likely to be switched at first opportunity - leaving only the high-risk customers with AIB/BOI)

 

[Brendan Burgess]

• Is the differential in deposit rates and mortgage rates with AIB/BOI of any relevance when a large part of that difference is related to the subsidising of tracker mortgages?

That is the point of this thread. If we set up a mortgage lender from scratch without the tracker mortgage baggage, how much would we have to charge to be profitable?

• Judging by the differential in the UK, and the fact that they are still offering tracker mortgages at BOE+1.88%, is it worth comparing to their system? - possibly not due to their Funding For Lending scheme and lack of a property crash to the extent that we've had

A good point. We should do comparisons with other countries - especially euro countries where the rate is the same. There are separate posts about the Danish and the Swiss mortgage system. A post on rates in other countries would be very useful.

• What is holding UK banks off on becoming mortgage lenders on a large scale in Ireland - is it the crashing prices or is it the difficulty banks have experienced in the past with repossessing homes?

Again the point of this thread. Mortgage lending is just not profitable in Ireland with the high deposit rates people are demanding.

If, as expected, repossessions are to become more of 'the norm' here, would a UK lender be tempted to enter the market at lower LTV's - even the switcher market?

I can't see how it wouldn't be economically viable for a UK lender to set-up here at LTV's of, for example, 50% and concentrate on the switcher market. The risk here is minimal - even taking into consideration the more restricted ability to repossess. There are a lot of people in more established homes purchased well before the peak that are stuck on our exorbitant SVR's

NIB have the best arrears record, because they targetted the switcher market with LTV loans. They probably have the worst cheap tracker problem though.


It's not just about avoiding defaults. All the banks are competing for deposits so the rates being paid out are just too high to have cheap mortgages.

• Would the Irish government have a hidden agenda in trying to avoid the changing of laws in a manner that would encourage more foreign banks to set up as mortgage providers here? (given the fact that the majority of the 'good' mortgages in the state owned banks are likely to be switched at first opportunity - leaving only the high-risk customers with AIB/BOI)

I doubt it. Overall it would be very good for the country if a foreign lender came in and offered lower mortgage rates.

 

[marathonic]

All the banks are competing for deposits so the rates being paid out are just too high to have cheap mortgages.

This is a major problem with DIRT at 33% - noone is enticed to save in cash.

Perhaps a similar setup to the UK's Cash ISA's would benefit banks to a certain extent, i.e. give people an allowance of several thousand euros per year that they can deposit within a wrapper where no DIRT is due. The annual allowance ensures that the wealthy aren't the major benefactors and also allows the government to keep tighter control by raising/lowering the allowances annually.

Banks competing for deposits in the UK can secure such deposits extremely quickly if they're willing to increase their ISA rates to the extent that they move to the top of the best buy tables (allowing customers to switch to their product).

Banks with sufficient capital, the means to pay good interest rates and a desire to keep existing customers happy can have high rates but refuse transfers in. They allow new customers but those customers aren't allowed to transfer deposits accrued using previous years annual allowances to their deposit schemes - instead, they remain with the old provider or some other provider that allows transfers in.

I doubt it. Overall it would be very good for the country if a foreign lender came in and offered lower mortgage rates.

Probably true but the conspiracy theorist inside me sometimes thinks that, if HSBC set up here offering mortgages at, for example, 3.75% and allowing switches, would the government not be worried that all those able to switch would do so. Effectively, this would render AIB/BOI unable to increase rates because the only people left on their books would probably be those that can't afford such increases.