Claims by mortgage lending companies that they are victims ring hollow, writes Quentin Fottrell.
BLAME IT on the little people. That's effectively what happened on Thursday's Prime Time. Reporter Paul Murphy did an undercover sting. He was advised by two Irish Mortgage Corporation staff on how to inflate his salary from €50,000 to €70,000 for a €212,500 mortgage. That is still nearly €100,000 below Ireland's average house price. And yet it was the hapless employees who got blamed.
The Prime Timereport secretly filmed two young IMC employees who were helping Murphy inflate his income on a mortgage application. Murphy got approval in principle, but IMC claimed Murphy also said he had a €25,000 deposit. It was the poor, defenceless bank which would ultimately be conned by this procedure and which was portrayed as the ultimate victim.
Ten years of the biggest financial pyramid scheme in the world and who gets it in the neck? The employees. In studio, Mark Little asked Frank Conway, a director of IMC, if salary inflation represented IMC's culture. "Our argument is not with individual brokers here, it's with the culture of the company," Little said. If that is the case, it's a shame that Little Co had to show the faces of the little people.
"These tapes do not represent the standards of our companies or the standards of our employees," Conway said in response. Having worked in the American mortgage industry from 1992 to 2004 - and we all know how that turned out - Conway returned to work as a mortgage broker in the Irish market. He more than most knows the bricks-and-mortar, wheeling-and-dealing, of house-buying.
Here's how wage inflation works: lodge €1,000 into your bank account and withdraw it. Keep recycling the same €1,000, and you will see your annual salary magically increase over time. If the bank asks you why you withdraw €999.50 so regularly, say you eat out a lot or like expensive art but will curb your ways when you are a proud homeowner. It's not kosher, but many do it.
We are a nation of fiddle-faddlers. That is how we survived the Famine . . . and house prices that still average €300,000 for first-time buyers. There is a kosher way too: if you are self-employed, it is perfectly okay to use "projected earnings", once they are certified by an accountant: 2008: €32,000; 2009: €40,350. Odd numbers make it look like you've been up all night with a calculator.
The other part of Prime Time'sreport said sub-prime lender Start Mortgage charged one man nearly 10 per cent interest, which is shocking. But Start is filling a void left by the banks, and desperate times lead to desperate measures. The financial regulator only started regulating the procedures - affordability, suitability and arrears - of non-deposit-taking lenders like Start from June 1st.
Banks are not the victims. On the contrary, they helped cause the problem. They offered 100 per cent mortgages and spent the boom offering brokers lucrative 1 per cent commissions. Brokers vie for your business and sell that financial story back to the banks. What's more, many banks turn up their noses at subprime lenders, pushing them into the crippling embrace of Start Mortgages.
Here's more on the culture of house-buying. Conway extolled the virtues of a 40-year mortgage last January. "First-time buyers choose a 40-year term in the first couple of years to keep repayments down, helping young people get a foot on the property ladder. But once their financial situation matures, they usually refinance to a shorter term."
Not in a slowing economy they don't.
The usual calculation of a €300,000 30-year mortgage with 5 per cent interest gives a repayment of €1,610 per month. Few mortgage brokers like to circle the total repayment of €579,766 with their yellow highlighter pen, though it's important to see that final figure in black-and-white. Over 40 years, you pay €1,446, or €694,080, more than double the value of the original mortgage.
But Conway has a solution: "Nobody actually ends up paying the same mortgage for 40 years," he said in January. "In fact, a first-time buyer who has been paying a 40-year mortgage should arrange an independent review to assess cheaper options available to them." Bankers have it both ways: pay a truck load of interest over 40 years, but you can hike your payments later . . . if you can afford it.
A disclosure: I used IMC to buy my first home. I would have been a "non-conforming" customer as I was recently self-employed with a fluctuating income, so I used the projected salary, certified by an accountant.
It was perfectly above board and, to pay the mortgage, that projected salary became a self-fulfilling prophecy. IMC also sold me a range of financial products. I have no complaints.
Who knows what lies ahead? We could all be out on the street with our knapsacks on our backs or have to move in the Waltons to pay rent. We could win the Lotto. Or . . . we could sit pretty and work as many jobs as necessary to keep the Repo Man at bay.
Most house-buyers take full responsibility for their behaviour of making the unaffordable affordable. IMC and the banks should do the same.