Jill Kerby

WE ARE BEING BLED DRY YET AGAIN TO PROP UP STATE OWNED VHI 

What would the New Year be without another rise in the private health insurance levy – aside from being easier on the wallets of Aviva and Quinn healthcare customers? 

This year’s €20 per adult and €11 per child mugging, er, increased levy, will bring the total annual cost of subsiding the sickly, ageing VHI, to €205 and €66 respectively or €532 for a family of four.

That the VHI still remains wholly owned by the Department of Health should surprise no one, despite the announcement last May that it would be sold off.  There’s hardly a queue of foreign insurers lining up to buy a company that is weighed down by a legacy older, higher risk members, a huge staff on civil service pay rates and defined benefit pensions and expensive overheads.

Anyway, this is hardly a good time to be expanding a health insurance business into Ireland as more members drop to lower cost plans or lapse their policies altogether.

The combination of the levy, the 21% higher charge for private beds in public hospitals that was announced in November and the usual c10% hike that is probably on the way due to endless medical cost inflation, means that some people on higher value plans could see their health insurance premiums soar by about 25% this year, say health insurance brokers.

Unless you’ve got a very secure job and deep pockets the only thing to do is to review your policy and see where you can cut corners.  Dropping down to the lowest cost plan, is not necessarily the best idea however, since so much elective surgery in public hospitals is being curtailed and the cheapest plans may not provide much or any access to private hospitals. Also, moving back up to higher value plan later may not be possible if you develop a medical condition in the interim.

Consulting a good broker who specialises in private health cover before your renewal date is highly advised.

Dermot Goode of www.healthinsurancesavings.ie says exiting your existing plan before your renewal date, even if you are in a group scheme, and then setting up a new policy could mean you secure your premium at the 2010 rate for another year. You should also consider switching to the better value corporate version of your plan, which everyone is entitled to do, or you can drop access to private room accommodation or even the ‘day-to-day’ part of your policy to potentially save hundreds of euro.

As for the VHI, it will remain, like the now nationalised toxic banks, a government owned black hole into which other people’s money will flow, unless it is privatised, broken up and sold off.  

The danger with the VHI, like the banks, is that because of its dominant, ‘too big to fail’ status, the levy will have to keep going up, making private health insurance even more unaffordable than it has become for so many people.

The pressure that will put on the public health service isn’t worth thinking about.

*                      *                        *

Health insurance is just one of many a big ticket expenditures you may want to keep paying in 2011, along with the mortgage or rent, groceries, utilities, educating your kids and putting away some money for a pension. 

Unfortunately, you may also need to factor in thousands of euro in higher taxes starting this year and for at least a generation as your personal contribution to the monumental private debt bill that the outgoing government ‘socialised’ in its attempt to save the insolvent Irish banks.

Depending on who you ask or who you read, the total debt bill of the Irish nation ranges from about €160 billion to somewhere in the region of €400 billion.  Let’s just agree that it’s too big for 4.2 million people to ever pay, especially since of only 1.8 million are actually working.

None of us were asked if we wanted to pay this debt, or if we could.  As far as this government has been concerned, the debt and the austerity plan is ‘manageable’.

Of course it isn’t.  We’ve run out of other people’s money and the austerity plan is just another shovel that will dig the hole deeper.

Hopefully, the new government we elect in a few months will also recognise this and not just call a halt to the EU/IMF ‘recovery’ plan, but make sure Ireland is first in the queue to declare it unworkable, before all the other countries with serious bank problems, non payable national debts and unsustainable public spending bills are also forced to face reality and the eurozone unravels. 

Not being able to pay your debts, especially bank debts that were not entirely of your own making, isn’t an excuse for a country, or an individual, to borrow more. It’s an opportunity to seek a controlled bankruptcy that will certainly cause great hardship, but only temporarily.  It’s a chance to rebuild a broken state and broken lives.

Hopefully, this is the year in which we all learn about money – not just how it is manipulated and distorted by politicians, bankers and other vested interests - but how, living within our means, it can be legitimately earned, saved and invested for the prosperity of the entire nation.

Let 2011 be the year the government fears the people.  

Tweet

REGULATOR MUST COME CLEAN ABOUT THE STATE OF BANKS

As you contemplate which of your Christmas presents doesn’t fit, doesn’t work or doesn’t ring the bells or whistles it advertises, at least there is now a consumer protection code in place that allows you to bring the item back for refunds or exchange or to go to someone in authority to make a complaint.

It wasn’t always so in this country.  Ten years ago, there wasn’t anywhere near the protection available now even for the most expensive purchases you could possible make – for a house, investment funds or policy, a pension.  Regulation up to 2000 was incredibly ad hoc in this country with consumer regulation in financial services in particular, left pretty much to the banking and investment firms themselves.

Those regulations have tightened up since the consumer division of the Financial Regulator (now back under the umbrella of the Central Bank) was set up in the mid-2000s, but it’s only been since the new, Central Bank regulator Matthew Elderfield was appointed a year ago last October, that the financial service companies of Ireland are finding out what it means to have a proper watchdog patrolling your turf.

I wrote an open letter at the time to Mr Elderfield, a former CEO of the Bermuda Monetary Authority, reminding him that Irish consumers were, ultimately, the people to whom he should be answering. A year after he began trying to come to grips with the disaster zone that his predecessors left him at the Central Bank, it is still a major work in progress. 

Despite the thousands of hours that he and his new team of regulators have clocked up in making sense of what happened in the Irish banks, by their input into Nama and the negotiations with the IMF, the EU and European Central Bank on the debt crisis, the new Regulator has been able to amend and construct consumer protocols and regulations, including a major review of the Consumer Protection Code.

I noted back in October 2009 that his ex-colleagues at the UK Financial Services Authority had produced a review and protocol for the mortgage market and how important a similar protocol was needed here, even if curtailing the worst of the banks’ lending practises after the mortgage market has collapsed, was very much in the ‘horse, bolt and barn door’ category of reform.

Nevertheless, that new Irish mortgage protocol is also now in place.  Some day, when people do start buying homes again, chances are, because of this piece of regulation, fewer people will end up borrowing themselves into lifelong penury or insolvency. The strict new lending rules will make it harder to buy their first home but it should also help stop property bubbles being blown up and mortgage lenders imploding.

The emergency mortgage arrears measures that Elderfield has facilitated this past year with the cooperation of the Irish Banking Federation and consumer groups, has temporarily postponed the repossession of thousands of private homes.  But the Regulator, and his expert group ruled out debt forgiveness on the grounds of moral hazard risk. 

Was it really his or their job to make such a judgment?  He must know that the massive personal debt and arrears problem in this country has only been deferred and could ultimately make things worse for the banks, not better.

The other pressing issue that I suggested the new sheriff tackle – the loss of confidence in the banks by ordinary people – hasn’t been adequately dealt with by anyone in authority. (The Regulator’s new team has been successfully in strengthening and improving the supervision and regulation of the credit unions, which should be very reassuring to all credit union members.) 

Irish bank guarantees of varying duration have come and gone and come again, but the people of Ireland continue to worry, with good reason, not just about the return on their funds from the insolvent, but the return of their funds.

Billions in deposits have been taken out of Anglo Irish, AIB, Bank of Ireland, Irish Nationwide and the EBS by institutional investors (who know when the game is up) but also by big and small savers, much of it held the elderly, who simply cannot afford to lose their life savings and may be the only people in their families who remain solvent.

Will the Regulator address this genuine fear in 2011?  Is it within his remit to say what might happen to the savings and investments of ordinary Irish people if our sovereign default deepens?  Or if the crisis in the eurozone gets to the point where our membership of the euro is in doubt?

Back in late 2009, there were all sorts of financial consumer issues that I felt needed a good examination by a proper regulator who had the interests of the people of Ireland foremost in his sights, such as the abuses inherent in commission remuneration and the lack of general financial education.

Events overtook Elderfield.  Like our roads and footpaths, the money supply of Ireland has nearly frozen solid and those other issues are not so pressing.

 Instead, Matthew Elderfield will do this country a great service in 2011 if he just manages to tell us the truth about the position of our financial institutions, the currency we use and how safe it is to save, invest and spend. 

Tweet

The Sunday Times

MoneyComment  Feb 7

By Jill Kerby

 

 

Last weekend the Minister for Communications, Energy and Natural Resources Eamon Ryan told The Sunday Times that the government planned to appoint a panel of external experts to provide proposals to deal with the huge problem of residential mortgage debt and defaults.

 

I wish I could believe that there is such a thing as ‘a panel of external experts’ in this country, especially regarding mortgages and property.  The ones in the banks who claimed expertise, turned out to be morons.

 

Anyway, the minister says this expert panel will consider every option, such as stretching mortgages over longer terms to reduce monthly repayments; debt-for-equity swops where lenders would take ownership stakes in borrowers’ homes; and even purchase or rental arrangements similar to the joint ownership schemes that are now operated by local authorities.

 

The lobby for legal aid quickly joined in too to say that new insolvency rules will also have to be introduced to allow those mortgage holders for whom none of the above will be suitable, to be able to hand back their keys without facing financial ruin.

 

All of these proposals, said Ryan, are in addition to the repossession moratorium already in place with the main banks and the mortgage interest supplement (MIS) currently being paid to struggling mortgage holders. 

 

I reread the Minister’s comments several times, but couldn’t find any reference to the most important consideration of all: how much will all this cost, and who pays? 

 

If, by some miracle, the billions of euro that will undoubtedly be required are found, what about the moral hazard – the danger that homeowners who are just about coping with their negative equity mortgages might decide it’s also in their interests to walk away from their debt?

 

The Economic and Social Research Institute now estimates that a third, or up to 196,000 of all households are in negative equity- owing more than their homes are worth. 

 

The Financial Regulator says that at the end of last September 26,271 mortgages were in arrears for more than three months, with 17,767 mortgages in default for more than six months.  If the mortgage interest supplement was cut off tomorrow, the arrears figures could theoretically double.  Given than the figures are six months old, they probably have done so anyway.

 

At the end of last year, according to an Oireachtas report by Deputies Thomas Byrne and Olwyn Enright, 15,100 people were in receipt of an average €367 monthly mortgage interest supplement and another 1,000 applicants were being turned down every month.  (At the end of 2007, just 4,111 mortgage holders were getting this supplement.) 

 

The annual cost of this bail-out is already over €66.5 million. So who will pick up the even larger tab?

 

The last time I looked, the Irish banks were still on life support. Loading them up with yet more arrears doesn’t sound like a very likely solution. 

 

As for the state carrying the can, the national debt, you may not have noticed, is already €76.976 billion as I write and rising by the hour. Check it out at: http://www.financedublin.com/debtclock.php

 

 

The Minister might want his panel to look at the experience in America before endorsing the idea that borrowers could exchange their unaffordable mortgages for a rental contract under which they lease some or all of their home from their lender.

 

In some places where this state or federal backed ‘solution’ has been tried, many first time buyers in particular have come to regret signing up. The monthly outgoings might be lower, and the threat of eviction removed, but they are now repayments might be more affordable and they aren’t in danger of being evicted, even more tightly locked into starter homes that they never intended to live in for more than a few years. 

 

 

As the resentment increases,  lenders will find more sets of keys pushed through their letter boxes.

 

 

It’s possible that the Minister and his panel of mortgage experts will come up with a set of proposals by the summer…but affordable, workable ones are another matter altogether.

 

 

*                      *                          *

 

 

The Irish League of Credit Unions told a Joint Oireachtas Committee on Economic Regulatory Affairs last week that it was unhappy with “the over-zealous and intense” approach that the Registrar of Credit Union Brendan Loguehas taken in his regulation and supervision of them.

 

 

It’s nice to know that at least someone in the Financial Regulator’s office has been doing their job properly. 

 

 

Too bad the ILCU doesn’t see it that way.  It’s convinced that credit unions are being subjected unfairly to onerous regulation when the banks and building societies have got away with ‘soft-touch’ regulation.

 

Credit unions had no part in bringing the country to the brink of financial ruin, but in the few years that Brendan Logue has been in charge of regulation, he has uncovered all sorts of debt and solvency problems, poor investment practices and compliance and administrative shortcomings in several credit unions.

 

Logue will retire shortly and I hope his successor takes the ILCU’s criticism for what it is, and keeps doing was Logue has been doing.  It’s clearly working.

 

Tweet

Here's your first mugging of the year

On New Year’s Day, over two million people were mugged in this country. And practically nobody noticed. Unbeknownst to nearly every private health insurance member in this country, an extra €25 and €2 was slipped onto the existing health insurance levy of €160 per adult and €53 per child member.

The levy was unilaterally introduced last year by the government to subsidise their own insurer, the VHI, after the Supreme Court threw out the original, illegal, risk equalisation legislation in 2008 that, had it been implemented, would have resulted in an annual subsidy of tens of millions a year to VHI from the other two private insurers. This levy is an outrage; let’s call it what it really is – a tax.

But it was also outrageous for the government to arrange for it to appear as a footnote in the papers on New Year’s Eve, a day when most of us were either distracted with that evening’s plans or doing our best, for at least one more day, to ignore what was happening outside our own four walls. This first tax increase of 2010 means that a typical family of four with private health insurance will need to find another €480 this year on top of whatever increase their health insurer has imposed - regardless of the value of that plan. For the typical VHI member family of four, whose premiums, it was announced last Tuesday, will rise by c€180 in 2010, their health insurance bill will now be €660 higher than it was before the levy was introduced. Is it any wonder the VHI have lost 120,000 members in the past year? (The price hike, incidentally, was not passed onto corporate members – more about that below.) Meanwhile, do not be deceived: the price of health insurance is soaring and the number of members is now falling, not just because, as VHI insists, the cost of delivering better health treatments continues to defy normal inflation. No, premium costs now because the government, and specifically the Department of Health who oversees VHI, is not willing to properly address two problems - VHI’s disproportionate number of older, legacy members who could be distributed to the other two insurers on exactly the same terms and cost, and the fact that the government should not be in the private health insurance business in the first place. Instead, the Department of Health mandarins, whose empire would go if the VHI was privatized have convinced the government to tax every private insurance member in the state to keep their VHI alive. This government run company has lost 120,000 paying customers in 2009, and it will incur losses of €80 million. It is obliged – like all insurance companies operating in Ireland - to have solvency reserves of 40% in place by March, yet they have steadily fallen since February 2008 from 35.9% to just 22%. And by some form of accounting method known only to its chief executive, the VHI last week claimed it is the most cost-efficient health provider in the state. The VHI is hemorrhaging members and income and it cannot meet its solvency requirements. It is likely to seek a direct government bail-out in 2010. Yet it has not made any sweeping, cost reductions. There is no redundancy plan in place. It maintains a staggeringly expensive (and in deficit) defined benefit pension plan and it still operates six branch and offices in Cork, Abbey Street and the Naas Road in Dublin, in Dun Laoghaire, Galway, Kilkenny and Limerick, and in Gweedore, Co Donegal for crying out loud. This is not a legitimate company operating by the same rules that its owner imposes on its competitors. But unless some solution – other than levies and taxes – are considered the risk is community rated, private health insurance premiums will simply become unaffordable to the wider community: it is, after all, younger, healthier members who are cancelling their policies, not the older ones who are claiming the expensive treatments and benefits. Meanwhile, in light of all of this, allow me to share my first money-saving tip of the year with you: if you are determined to keep your private health cover but need to cut its cost, here’s what you do, because I did it myself last week. Under community rating every health insurance plan must be available to every member, regardless of age, including the equivalent plans aimed at the corporate sector. The health insurance companies do not want you do know this. That’s why they say they are “specifically designed for businesses” and don’t promote the plans in any materiel they distribute to individuals or make it easy for individuals to access information about the equivalent corporate plans on their websites. However, fee-based, independent insurance brokers and advisors say switching to a corporate plan – the equivalent or lower level to the one you have now – is a guaranteed way for individuals and families to potentially save hundreds of euro a year. After finding out the corporate equivalent to my excellent Quinn HealthManager plan last week, I saved my family of two adults and one child €231 a year by simply requesting the Quinn staffer at their call centre to make the switch, which was done after my instruction was cleared with a supervisor. To give them their due, Quinn Healthcare and Aviva Health include all the corporate plans on their website so that you can – admittedly with some effort – compare them to your existing one (or an even lower value plan). Save yourself the effort and pay a good broker a modest fee to do it for you. Unfortunately, if you are a VHI member you won’t be able to check out their corporate plans – they are not available on their website. Why doesn’t this surprise me? Call the broker.

Tweet

One of Marianne Finucane’s guests on her radio programme last weekend was a civil servant who made an interesting point about why there is such a sense of grievance on the part of public servants about the 7% gross pension levy that was imposed on them this year:  in his own case, his 13% gross salary contribution into his pension is now “greater than the size of my mortgage”. Others will substitute ‘child care’ for mortgage. 

He made point that private sector workers know all too well - that private pensions are very expensive, not to mention risky, which is why only about 50% actually have one.  

So here’s a suggestion that might help get us over the great pension levy hump:  allow civil and public sector workers an opt-out clause if they feel that the burden of a 13% pension contribution for a guaranteed, 50% final salary defined benefit pension at retirement is too high.  

Those workers who cannot afford a pension and a mortgage or child-care during the high spending years when their families are young, should be allowed to join at a later age when their incomes are not under such pressure. 

I thought Ryanair boss, Michael O’Leary’s recent suggestion that public sector pensions should be immediately converted into defined contribution ones rather than defined benefit (which include hugely valuable service and salary guarantees) was also interesting, but of course this could only happen for future contributions.  

The current total public sector pension liability going stands at €100 billion and all benefits are paid out the current tax take – that is, the Pay As You Go system.   This means that aside from what’s left in the National Pension Reserve Fund - €16 billion?  €18 billion? – there is no other pool of cash under investment to pay this massive commitment. 

I’ve been undergoing a major review of my own pension that is, thankfully, nearly over.  

I know exactly how that civil servant on Marian Finucane’s show feels:  pensions are bloody expensive, especially when you’re funding them entirely on your own, as I have since 1987.  And if you want one that’s going to deliver a comfortable retirement for yourself and your spouse, you have to forego quite a lot of spending – on big mortgages, holiday homes and lovely, new cars and furniture.   

It’s been a sacrifice I’ve been willing to make – I don’t want to be old and poor, not in this country -  but my commitment has certainly been shaken by the hammering my funds have taken this past year.

As the national debt soars just to meet the state payroll and unemployment benefits, everyone who is struggling to meet their day-to-day expenses, whether they work in the public or private sector should have the right to choose whether they can afford to make pension contributions. 

But only if they’re clear – like the rest of us are - about what it means if they opt not to. 

 

I too oppose cuts to the child benefit payment in next month’s Budget. 

Except, unlike all the women’s and child advocacy groups that have come together to lobby the Minister for Finance, I think the entire €2.5 billion boondoggle should be abolished, to be replaced with a means-tested payment to those parents and children living in poverty, on unemployment benefit and very low incomes to ensure none of these children go hungry, naked, without shelter or an education. 

Where the lobbyists and I digress is that I think this country is bust and they don’t. We are in the early days of an economic depression, and only for the financial IV tube that the European Central Bank has rigged up for us, we’d be queuing behind Iceland and Latvia at the IMF court of bankruptcy.

Some day, hopefully only a decade or two from now, when we have a properly functioning economy of hard working, self-reliant, vibrant, export-earning citizens, the state will be in a position to return to the old, fairer system of allowing parents of children to claim some tax credits for the cost of raising each child, who in turn, someday, will be a net contributor of tax to the state. 

Under my proposal the loss of €535 a month for a family with three children will of course be a hard blow if they don’t have a financial cushion of savings and low debt to fall back upon.  It means no more family holidays, no second car (or maybe any car) or other luxuries. Basic things like children’s clothes will have to be passed between siblings, mended or sourced from other family members, friends, from Penny’s or charity shops. Feeding everyone - conveniently – might be a thing of the past (but no one will starve.) It will be very tough if you’ve been living from paycheque and benefit payment to paycheque and benefit payment every month.  You will have to work harder, smarter.

But if €2 billion can be saved, it will be an extra €2 billion that your children won’t still be paying for…when they have children of their own. 

 

Last week my colleague Brian Carey in his Agenda column wondered why the state, in the form of the Department of Health “is still involved in [the health insurance] market.” He was referring to our exclusive page one story about how the VHI is seeking, for their own benefit, to have the health insurance levy doubled from €160 to €320 for every adult and from €58 to €116 for every child.  They need this money, they say, to offset their loss-leading older members, a legacy of their decades as the monopoly provider of health insurance. 

The only credible reason I’ve ever heard from a former VHI insider, is that the VHI is, and always has been the private little empire of the civil servants who control it from the Department of Health. 

Of course this incompetent government shouldn’t be in the health insurance business: in the UK and the Netherlands where at least 32 and 14 private medical insurance companies operate, not a single one lets a civil servant near them. 

Tweet

 

The Environment minister Eamon Ryan says the state has six months to come up with a credible scheme to prevent a bigger wave of house repossessions. 

Organisations that work with debtors, like MABS and FLAC, the free legal aid centre, would say that deadline is far too generous.  

Right now, the first of the 160,000 people who lost their jobs between October and May (about 20,000 a month) are already shifting onto means-tested jobseeker’s allowance. 

The €820 a month they’ve been receiving on job-seekers benefit could melt away once a spouse or partner’s income, and any other financial resources are taken into account, pushing many into arrears for the first time.   And who knows – aside from the Minister for Finance - for how much longer the state will continue to pay mortgage interest supplement at that bill creeps up towards €60 million? 

Eamon Ryan has suggested that the cabinet is already considering a scheme that will force the banks to take an equity stake – some suggest as much as 50% worth – in the property of some indebted homeowners which could then be described as an ‘asset’ to be recouped when property prices recover to 2007 levels.   

The genius who came up with this solution must be the same one who has projected that Nama will make a profit for the state within the next 10 years. 

 

Which is why we should be hoping that before any more cocktail-napkin-back-of-the-envelope policies are rushed through, the cabinet takes the proper time to study the Law Reform Commission’s wider recommendations on the reform of the treatment here of personal debt.  

At their annual conference last week the big debt picture was presented – and it isn’t pretty.  It is estimated that there is €395 billion in all private sector personal debt, about €110 billion worth being mortgage debt (according to recent Central Bank statistics) and another, €2 billion in credit card debt.  All other personal, commercial and business debt makes up the balance. 

Meanwhile, our average household debt to income ratio is now a massive 176%, says the Commission, a 276% rise between 1995 and 2008.   In other words, for every €10,000 being earned, €17,600 goes out.  In their own September financial capability study, the Financial Regulator found that 9% of those surveyed are in serious debt arrears – the kind that can result in losing your home - and another 8% had missed some payments. 

 

This problem isn’t just about the terrible negative equity problem of a generation of first time buyers, or the mounting arrears of unemployed homeowners.  It’s much, much bigger than that. This is the kind of debt that sometimes only a proper bankruptcy system can deal with, something the President of the Law Commission Mrs Justice  Catherine McGuinness said we desperately need in this country. 

I’m really sorry to keep harping on about how bankruptcy needs to be one of the options that the government should be considering, but someone has to.

Pension consultants I know seem resigned to the idea that pension contribution tax relief will be reduced in the December budget, perhaps to a flat 30%-35%, down from the 47% worth of tax and PRSI relief that applies now. 

There’s no question that higher taxpayers have enjoyed the bulk of the €2 billion plus in pension tax relief awarded every year; certainly there was no advantage to saving for a pension if you were out of the tax net or paying only a small amount of tax at 20% or 26% including PRSI. 

That will certainly change if the tax bands are widened, and draws back in many of the nearly 50% of earners paying little or no income tax right now.  That is, of course, if they can still afford to make contributions after the Budget dust settles. 

The same might apply to higher rate taxpayers.  Already, 19% of pension contributors have cut back on their pension payments according to a Friends First survey, and modest earners in the €36,000 to €50,000 pay bracket, who  are paying between 53% and 56% in tax, levies and PRSI on the top slice of their earnings and these people will most certainly think twice about tying up earnings for up to 40 years for a 30% tax break, if the retirement income they receive ends up subject to up to a much higher top rate tax. 

If a single tax relief rate is introduced, it should come with at least two new incentives – the right to access to the cash in your pension fund, and abolishment of mandatory purchase of an annuity for members of occupational pension schemes. 

The only thing worse than reduced tax relief for such people, is then to be stuck with a fixed pension for life that reflects lousy annuity rates and that then reverts back to the annuity/insurance company when you die, to the disadvantage of your beneficiaries. 

I’m a big fan of Sarah Beeny, the Channel 4 presenter of Property Snakes and Ladders and before that, Property Ladder.  Unlike so many of the fawning presenters of the ubiquitous property shows during the boom, she continually warned the stream of amateur developers that they were inevitably underestimating the cost of and amount of work involved in turning their old property wrecks into show-houses. 

She inevitably pointed out to the participants who did make huge capital gains that they benefitted far more from the bubble market than from their genius as developers or decorators, and she endlessly warned them about over-extending their borrowings, especially if they were going to pursue ‘careers’ as developers. 

Now that the bubble has burst, few of the latest participants on the renamed Snakes and Ladders have been able to sell their glammed up properties; most are renting (at a loss) or living themselves in their developments in the forlorn hope the market will recover so they can at least break even some day.  

Beeny has now spotted a niche in this depressed market and has filled it with a website for UK sellers called Tepilo.com .  

Anyone here in Ireland who finds themselves unable to even rent their empty buy-to-let should check it out for Beeny’s practical and realistic selling and pricing tips.  Especially now that Daft.ie has reported that there are over 20,000 rental properties on their site, and average rents, at €770 per month have returned to 2000 prices. 

Tweet

 

Progressive taxation - Move to Belize

The fact that 10 lenders have now agreed to a six month moratorium on pursuing mortgage arrears through the courts will undoubtedly be welcome news for those thousands of people who are receiving threatening letters from their lenders over their inability to meet their monthly mortgage repayments. 

The new arrangement doesn’t include the sub-prime lenders who not members of the Irish Bankers Federation and who have pursued a disproportionate number of repossession orders in the courts, but I’m not sure that’s such a bad thing. 

Subprime mortgage holders who are in arrears need to face reality: a large number of these higher cost loans, taken out on overpriced properties during the property bubble, were always unlikely to be repaid if their financial circumstances deteriorated or interest rates went up. 

Losing their house or apartment could be a blessing in disguise, especially if an agreement can be reached that involves a realistic repayment of any shortfall between the outstanding capital/arrears and any sale price the lender achieves.  One such distressed owner said on radio last week “that anything would be better than what we’re going through right now”, referring to the drawn out, legal process in which he and his partner were now trapped. 

The problem is so much bigger than the few numbers actually being taken to court suggest. 

Last summer, the Daft.ie economist Ronan Lyons calculated that 720,000 of the 1.7 million properties that make up the national housing stock would not achieve their last sale price. He predicted that 340,000 homeowners, a large number of them first time buyers, would be in negative equity by next year and because of high unemployment, 60,000 would be in arrears and therefore much closer to defaulting on their loans. 

This latest IBF lifeline is not going to be enough.  It will allow a growing number of desperate mortgage holders to tread water, but what the weakest of them need, is a genuine rescue boat.  

Fine Gael’s idea of a Nama-style equity-for-debt bailout may very well end up being adopted, but it doesn’t strike me as very realistic, no matter how “fair” it sounds now that the reckless builders and bankers have been saved from bankruptcy.  

By my own reckoning, the cost of a 20% equity-for-debt swop for 100,000 first time buyers with average mortgages of €250,000, who are now in serious negative equity of 35% - the amount so many estate agents and economists agree that property has fallen by since 2007 - would be at least €5 billion, plus debt servicing and administration charges. 

And that’s just the problem of some first-time buyers. What about the existing home-owners in danger of losing their homes through unemployment who borrowed heavily against their existing homes to buy second or buy-to-let properties, to invest in their businesses or even expensive lifestyles?

Should the taxpayer pick up the cost of their bad judgment, however encouraged they were to borrow by the reckless bankers?  What would the effect of this be on mortgage holders who were paying their loans, but were disgruntled by the more favourable treatment being given to their feckless neighbours? 

The Americans have set up all sorts of mortgage assistance schemes, even though home loans there are already ‘non-recourse’, meaning that the owners can walk away from an capital shortfall if they property is sold at a loss. 

Reports suggest that they are not all working to plan: owners who were eager to keep their home at any cost, and sign up for a part rent/part capital refinance deal often regret their decision if the property price keeps falling, or they see other nicer houses are now cheaper than their own. In those circumstances, they stop making repairs or renovations and there are many cases where they still end up walking away, crystallising an even greater loss. 

Since the banks don’t have the capacity to write off the scale of our bad mortgage debts – and the state ruled out bankruptcy, the natural solution a year ago when it started down the Nama road, what can be done?

All suggestions welcome.  They’ve got to be better than what our so-called leaders and captain’s of industry have come up with so far.

 

Private Health Insurance - Review your Policy

Private health insurance holder would be wise to review their policies soon: on January 1st two of the three providers, the VHI and Quinn Healthcare, are expected to raise their premiums by 15%-20%. Hibernian raised their premiums by 12% last month.

Dermot Goode, a fee-based advisor who specialises in private health insurance (www.healthinsurancesavings.ie) told me last week that more and more of his clients are finding it tough to justify the high cost of their existing plans, despite their concern about not having private cover.  

“If they do switch and are VHI or Quinn Healthcare members, they should do so now and lock into current, lower premiums for the next 12 months.” 

Goode says he’s worried about how the December budget is going to treat private health insurance premiums which still carry standard rate tax relief of 20%.  If the Minister reduces or abolishes the tax relief, or increases the €160 per adult and €53 per child levy introduced a year ago, he foresees even greater numbers of cancellations – some suggest as many as €10,000 a month are dropping their membership - and a big headache for the public health service. 

Tweet

 

A report has arrived in my inbox encouraging me (as a member of the media) “to take a holistic view of prosperity and understand how it is created. Holistic prosperity extends beyond just material wealth, and includes factors such as social capital, health, opportunity, security, effective governance, human rights and liberties, and overall quality of life.”

Quite right too.  The best countries in the world, say the Legatum Institute, a London-based think tank, are those with high scores in areas like health, safety, freedom, and social capital, but they also include categories that look at the country’s democratic institutions, education, entrepreneurship and innovation, good governance and personal freedom.

Their assessment of us under some of these categories is pretty startling. Not only did we come out 11th in the overall rank of 104 countries, but we somehow managed to convince the evaluators that we are the number two country in the world under the Health category, 5th under Economic Fundamentals and Safety and Security,12th for the three categories of Entrepreneurship and Innovation, Social Capital and Governance, the latter’s variables of which include issues like business regulation and corruption and  government effectiveness and corruption.  We also managed to come in at number 18 and 25 under Personal Freedom and Education. 

This is a fascinating report but I’m not sure I entirely recognize the country they call Ireland, especially when they rank the French at number 14 under the Health category.   Not to put too fine a point on this, but perhaps the data they were using was…out of date?  

You can download the 2009 Legatum Prosperity index here http://www.li.com/ and make up your own mind: 

 

It looks like it’s going to be a lean Christmas for the clients of Irish charities, even as some people perform small, anonymous gestures of generosity.

One day last week, just as the Society of St Vincent de Paul was imploring the Minister for Finance in its pre-Budget submission not to cut social welfare payments - “already this year, calls for assistance have risen by almost one-third in some areas, and the situation is getting worse” - the third world aid agency, World Vision Ireland received an envelope stuffed with €2,760 used notes and a raffle ticket.  

World Vision wants the donor to make themselves known so that they can thank him or her personally. “It’s incredible. It’s restored my faith in people, that’s for sure,” said the worker who opened the envelope.  

I rather doubt that’s what he or his colleagues in St Vincent de Paul will be saying about Minister Lenihan delivers his Budget speech on December 9th, except maybe the “incredible” bit.  

The Minister is in no position to be generous with anyone this year and even the charity sectors long standing request for enhanced tax relief on donations is probably now just a distant aspiration. 

 

Do you believe that the price of your house and all the houses in your neighbourhood have stopped falling? Me neither, but the Irish House Builders Association (IHBA) say not only that house prices may have hit rock bottom but that there’s going to be a shortage of property in the Dublin area in the next few years if the decline in new house builds continues. 

The IHBA is just one of a long list of property sector trade bodies that has no choice but to ‘talk up their book’ and put on a positive face in an effort to convince potential buyers, who are sitting on the sidelines, to take the plunge a become a home owner. 

They say that Irish house prices have already probably dropped by 40% and there is very little give left in the system.  What they don’t mention is that massively exuberant asset bubbles, like the 10 year long Irish property one, can give up nearly all its volume before the reflating process eventually starts all over again.  Laughably, their chairman Dominic Doheny last week sited “commentators” in AIB as a source for his belief that the peak to trough fall in Irish house prices will stop near or at 40%. 

House are now selling below cost price, claims the IHBA and “Current prices are not sustainable in the medium and long run. Companies will not resume building new houses or apartments until market prices reflect all cost inputs and a reasonable return for the investment.”

What does that mean?  That if prices do remain this low (or go even lower) the properties will never be sold?  That his members will bulldoze them into the ground? 

Clearly, no one in the IHBA realizes that during an economic depression, the price of all assets fall in proportion to the money supply – the availability of credit – just like the earlier price bubble was created by the inflated money supply and loose lending conditions. 

A deflated property price might not represent good value for the builder who is sitting on a loss, but the reality is that every house will find a willing buyer…if the price is low enough. 

With the market still moribund, there’s some way to go yet. 

Tweet

 

Since there is no stomach on the part of the banks or government to allow mass foreclosures on the growing number of people with negative equity - a six month to one year moratorium on legal proceedings is already in place depending on the institution – it’s inevitable that the “something has to be done” brigade will get their way…but at what cost?

 

It is projected that 200,000 homeowners will be in negative equity by this time next year.  Up to 50,000 people are thought to be in mortgage arrears. The list of ‘solutions’ cropping up in the papers and on the radio call-in shows is growing and includes suggestions like 

reverting every mortgage holder in serious negative equity onto interest-only repayments and then freezing current, low interest rates until “the recovery”; 

the banks’ writing off all or part of the borrower’s negative equity but letting the mortgage holder remain in the property; 

lenders having to adopt shared ownership schemes in which the borrower repays their original loan as a combination of rent and capital payments, ideally based on today’s market rent; 

multi-billion euro equity-for-debt swaps with a new government agency that is funded by an annual 1% levy on the mortgage repayments of all mortgage holders. 

 

This latter proposal is just daft.  The pool of levy payers is too small, for one thing to make a dent in the huge negative equity bill:  it would cost €2.5 billion to swop just 10% of the typical mortgage debt held by 100,000 first time buyers, who typically borrowed €250,000 during the last years of the boom.  The proposed 1% levy, based on an average repayment of about €12,240 by 600,000 mortgage holders would raise a paltry €73 million. 

 

Seeing as how my rising taxes are already preserving the public sector and a government that doesn’t know the first thing about good housekeeping, I don’t fancy paying another levy to bail out adult, first time buyers who didn’t have the sense to tell a bank official to get stuffed when he dangled a no money down loan in front of them that was five or six times their annual gross income and could only ever be paid off at the end of 35 years if interest rates never went up and the price of the property never went down. 

 

There’s only two ways to sort out a big debt: you pay it off, however long it takes and at whatever cost, or you (and your lender) write it off.  Both are deeply painful choices and the latter can result insolvency and a period of financial depression, but also a chance to start over again.  

 

Beggaring your neighbour, or even the next generation by forcing them to pay off your debts doesn’t seem right or fair to me.  But then I didn’t think Nama was a very good idea either. 

 

Generously rewarded trade union bosses are convinced that there is a large constituency of “rich” people, still resident in this country (as opposed to in Monaco, Portugal or Switzerland), who are just waiting to be bled, like Masai cattle, for the substantial cash transfusions that are needed to preserve their public sector members’ pay, pensions and benefits, and of course their own, seeing as how so many of their incomes shadow those of senior civil or public servants. 

 

The offshore money of the super-rich is already beyond redemption so Jack O’Connor and Dave Begg might as well save their breath.  

 

Meanwhile, imposing a super wealth tax on the value of their capital assets in Ireland – or even confiscating their mansions, art, horses or cattle here – would, I expect see this stuff sold or torched first and their owners moving permanently to the ‘summer place’ in Monaco.  

 

Which leaves everyone else earning €100,000 or more – Jack O’Connor’s benchmark to target. Slim pickings here, I expect.  

 

Aside from the usual suspects – the builders, senior bankers, politicians, older medical consultants, barristers with their snouts permanently wedged in tribunal troughs, high paid RTE ‘talent’ and some other monied professionals, few enough “rich” earners in this country have sidestepped the property and stock market crash or the sharp fall in turnover from their businesses. 

 

Nearly everyone I know still earning from €100,000 in a private sector job is, (like friends working for that money in the public sector) up to their eyeballs in debt which has to be serviced, alongside with all their other bills, from what remains of their after-tax income.  

 

Since April, between the income levies, health levies, higher PRSI limits, the private health insurance levy and the rise in VAT, the so-called “rich” are paying a higher rate of tax of over 52% now, meaning they too, ironically, are working for the government…at least until sometime in July every year when what is left of their money is their own. 

 

The only “rich” people left, frankly, that the trade union leaders may have to target are the wealthy hoarders in our society, those people, most of them middle aged and older, who prudently paid off their mortgages and avoided other debt; who lived within their means before and during the boom years; who are luckily still employed or already retired and who perhaps even made a windfall selling their family home and traded downwards when prices were sky high. 

 

This segment of society– and they even include little old ladies – have now boosted the national savings rate to 12% of GNP and are sitting on bags of cash that the union leaders must see that they clearly don’t need, or they’d be drawing it down.  A great big, whopping new DIRT tax of 70% would teach them …and it’s all for the common good of course. 

 

You think it hasn’t been suggested?  Let’s hope the Minister for Finance wasn’t listening.  

Tweet

Matthew Elderfield, the newly appointed Head of Financial Supervision at the newly integrated Central Bank of Ireland, is a man who must really enjoy the idea of a ‘challenging’ job.  

 

 

I’m trying to resist describing him as the Brendan Drumm equivalent for our disfunctional financial services regulatory system – you might remember that Professor Drumm was brought in to reform the health service - but at least Mr Elderfield, who spent eight years in the UK’s Financial Services Authority before his job as the head of the Bermuda Monetary Authority, has a solid track record in the business of actually regulating and supervising, as opposed to just working in finance (or medicine), though he’s done that too. 

 

He’ll have his hands full for some time in just trying to work out how the excesses and abuses that helped bring down our banking system occurred, but he has another job to do too – to ensure that the abuse that consumers have put up with, both from the financial institutions and, by default, from the regulator also comes to an end. 

 

His ex-colleagues in Britain are coming to grips with this as well. Last week, in their latest Mortgage Market Review the FSA has set out a new protocol for mortgage borrowing, all part of a process of barn door shutting after the horses have bolted, but necessary nevertheless. 

 

Since Mr Elderfield is a newcomer to our depressed shores, and is entering a viper’s nest of political intrigue, cronyism, blame-passing, incestuous relationships between regulator and regulated, perhaps it would be helpful for him if I make a few suggestions for his priority list of reforms on the consumer side of his taskbook:

 

I give information seminars every year at the popular Over 50s Shows that are held around the country.  Between the credit crisis of last year and the establishment of Nama, elderly savers are still hugely fearful of the banks’ ability to not just pay them a decent deposit rate but to also ensure the safety of their money. This is especially the case for the thousands of older people – many of them ex-bank employees - who have lost a substantial part of their life savings when their Irish bank shares collapsed and Anglo Irish Bank was nationalized.  You need to publicly address this matter, and long before the September 2010 deadline regarding the 100% deposit guarantee runs out. Vulnerable, anxious pensioners just want an honest answer about whether their deposit funds absolutely safe or not?  They’re not stupid.  They know that we are borrowing nearly €500 million a week to pay state salaries and keep the Taoiseach’s limo filled up, so where exactly is the money to repay deposit funds if a bank were subject to another run?

 

 

Get rid of commission remuneration. The British IFA has already stated that it plans to phase out commission sales for investment products by 2012 to stop the missellingof unsuitable, expensive life assurance and investment-based products, including mortgages.  Commissions are what drive stock brokers, mortgage and life and pensions brokers and other so-called independent financial advisors to push funds with the highest remuneration, regardless of the suitability of the product or the investment risk.  Your own Ombudsman publishes quarterly reports full of commission-related horror stories which you can download onto your Blackberry www.financialombudsman.ie that you can check out between now and January when you take up your job. 

 

While you’re at it, perhaps you could also reassure depositors that under your watch, Irish banks will be required to inform depositors with substantial sums of money in bog standard 0.5% demand deposit accounts that their bank in fact offers higher yielding returns in other instant access or fixed rate accounts.  These inertia accounts are a huge source of revenue to banks and a source of great loss to their elderly customers in particular and it’s just a slimy way to do business that was outlawed – perhaps you recall - in the UK many years ago.

 

There’s a lot to be done on the mortgage and debt front too.  You might start by issuing the lenders with a new protocol in dealing with arrears and negative equity. You need to tell them to lay off imposing penal interest and cash penalties on people in arrears and formalize the protocol for negotiating new interest payments or extended terms. 

 

Another barn door that needs to be closed is the selling of 100% loans, 40 year mortgage terms to anyone over the age of 25 and self-service or ‘liar’s loans’, another irresponsible and reckless lending practice that your old friends in London just announced is to be abolished in the UK. Despite what your new staff here in Dublin will tell you, there was never the degree of stress testing of mortgage loans that there should have been.  We may never have had the degree of sub-prime lending that occurred in the US or Britain, but the widespread selling of huge loans with no money down required and endless repayment terms was our home grown version. Now, of course, so many of these young mortgage debtors can barely meet their interest payments, let alone see a time when the capital will be repaid. 

 

This is just the tip of toxic iceberg. I haven’t even started on stockbroking practices or the missellingthat goes on in insurances companies.  But good luck in the new job…you’re going to need it.   

Tweet