ESBies versus all-out Eurobonds

Euro-nomics is a think tank created by a group of European economists with the aim of providing economic solutions impartial from the priorities of their home states. The organisation includes Irishman Philip Wall of my own alma mater Trinity College. In the past week Euro-nomics have published quite a comprehensive set of proposals on their response to the current Eurozone crisis. The key tenet of their report is the creation of a new type of bond known as European Safe Bonds (ESBies). ESBies, the group intends, would be issued by a newly developed European Debt Agency and would not require new fiscal integration legislation. They would consist of a liquid bond designed to minimize risk, issued in Euros and subject to the ECB’s anti-inflation commitment, much as generic Eurobonds might be. The new European Debt Agency would buy the sovereign bonds of member states according to the states’ relative sizes. The EDA would hold these bonds as assets on its balance sheet, and use them as collateral to issue securities.

What differentiates ESBies from Eurobonds is that ESBies are designed to be divided into two different types of security. The first security, the ESBies, would involve a senior claim on the sovereign bonds held by the EDA. The second security would have a junior claim on these bonds and would be first to absorb whatever loss is realized in the pool of sovereign bonds that serve as collateral. So any failure by a sovereign state to honour in full its debts would be absorbed by the holders of the junior tranche security. Both levels of security would be sold to willing investors on the market. Investors who want to hedge or speculate on the ability of European member states to pay their debt could trade junior tranches while investors seeking a safe asset denominated in a stable currency could buy ESBies.

So far, so good. I am a definite proponent of Eurobonds; though I consider myself Eurosceptic I am also Irish, and Ireland has taken on a colossal amount of debt rather than burn the holders of Irish bonds, ultimately preserving the security of the Euro. So I am naturally in favour of some reciprocal action on the part of the rest of the Eurozone (ie Germany) and think that the issuing of Eurobonds, EU debt guaranteed by all EU countries, is the best way forward. Any practical plan for the viable implementation of Eurobonds will find favour with me.

However one issue that concerns me is that I can’t see the market rushing to buy into these junior securities that will have to compete with other high yield products. Simply put, is the investment market so big that sovereign debt will be in demand to the extent that is required for this whole idea to work?

It is important to remember that both Eurobonds and Euro-nomics’ solution only provide a route for struggling banks to seek finance at a more reasonable rate than currently quoted on the bond market, thus avoiding automatic default. It does not in any way rectify the actual debt racked up by certain Eurozone countries. These states will continue to struggle with the burden of their debt, but they will at least have a method of financing it rather than being forced to default.

Mortgage to Shared Equity Scheme far superior to Mortgage Interest Supplement

At the last count, one in nine of all Irish mortgages were in arrears. That statistic does not even account for those many homeowners who are barely making their payments or are likely to fall into arrears in the near future. This crisis has inspired a passionate response. Those in debt are desperate for a solution and call for Government action while others condemn the idea of forgiving the debt of some while most of the populace are still struggling with other types of bills. There is no answer that will satisfy everyone but there is a potential solution that has been inexplicably ignored by the Irish Government. Shared equity schemes offer a realistic remedy to the country’s mortgage arrears issues.

Mortgage to shared equity schemes allow home owners who can no longer afford their mortgage to reduce their level of secured debt while retaining a stake in their home. Such a scheme sees the Government take on a portion of the mortgage and in return gets a stake in the property’s equity. This does exist in Ireland at some level, in the form of the Shared Ownership Scheme. However this is aimed at first-time buyers only and so does nothing to address the current problem of existing mortgages that have moved into arrears.

Scotland’s Mortgage to Shared Equity scheme operating under their Home Owners’ Support Fund is a model example. The scheme was established in 2009 and assists homeowners who are in danger of having their homes repossessed. It involves the Scottish Government taking a financial stake in a mortgagee’s property. The individual still owns their home and continues to have responsibility for maintaining and insuring it. But they will have reduced the amount they must pay their lender every month, since the Government will now pay a portion of the mortgage proportionate to the equity stake they have taken on.

In my time working with mortgage arrears lobbyists, if ever a suggestion of a shared equity scheme in an Irish context was floated it was shot down as too expensive for the state to absorb. This is a foolish response. Currently the only relief available for people in mortgage arrears is Mortgage Interest Supplement, a payment operated by the Department of Social Welfare. MIS was enacted in 2007 and not designed to bear the volume of mortgage arrears cases we are seeing today. Envisaged as a temporary form of assistance, in some cases MIS has now been paying the interest of certain mortgages for more than five years. The most scandalous aspect of MIS is that all payments go directly into the pockets of the banks; the state gains nothing. This is wasted money.

A mortgage to equity scheme would at least gives the State a portion of a property’s equity in return for taking on the proportional shared debt. Thus when the property is later sold or redeemed back by the original mortgage-holder, the state gets the benefit of this equity. Obviously this may be reduced in cases of negative equity but the State, unlike individual debtors, will not be forced to sell at a low point in the market. They have the liquidity to retain their equity in these properties for an extended period, say ten or twenty years, by which time property prices will hopefully have stabilized and increased.

The number of people accessing MIS increased by more than 260 percent between 2008 and 2010 to 15,100 families, according to the interim report of the Mortgage Arrears and Personal Debt Review Group. In 2009, the supplement cost more than €60 million, compared to €12 million in 2007. In 2010 the average payment was in the region of €367 per month. This is the definition of expensive since these payments are essentially money down the drain. It is time for the Government to scrap this supplement and look to the Scottish example by providing a more viable solution in the form of a mortgage to equity scheme.

North to South currency exchanges: money is falling through the cracks in the border

I have recently started a new job in Northern Ireland. It has not been any great move; on our little island only an hour and a half’s drive from Dublin results in a new currency and jurisdiction. Still I’ve been surprised to find how difficult it is to transfer money online from a Northern bank account to a Southern one without incurring a ridiculous fee.

I have expenses that must be paid in both the North and the South, in Sterling and Euros. Thus like many people I have a bank account in both states. I also have a full-time job that makes it difficult for me to physically visit my banks to withdraw and lodge money. Instead I am an enthusiastic user of online banking, a service that consumers now view as standard and expected. Despite the fact that some taxpayer-funded Southern institutions have the gall to begin charging us for this service, a large portion of society now perform most of their banking online. So I was surprised to find that it is not possible to move money online from an account with a bank in Newry to an account in Dundalk, ten minutes drive away from each other, without being charged a ridiculous international transfer fee.

I can transfer money online from an Irish Euro account to Romania for a smaller fee than to transfer money to Northern Ireland. All EU countries except the UK are subject to SEPA, the Single Euro Payments Area initiative. SEPA dictates that a bank must charge the same amount for SEPA Euro credit transfers as they charge for domestic credit transfers.

Although there are vaguely less costly ways to transfer money cross-border, including by bank draft (which generally involves a £5 or £6 charge) or by physically withdrawing and lodging the money (where travel expenses alone will add up), I must stress that I am only concerned with what options are available online. So what options currently exist for the Northern employee with Southern bills who is tech savvy but time poor?

I bank with Bank of Ireland who as it turns out are one of the least helpful institutions on this issue – you simply can not make cross-border transfers online with this bank, even though they have dedicated northern and southern branches. I found it a challenge to gather comprehensive information on any bank’s transfer rules but eventually a BOI advisor was able to explain that the only way to perform such a transaction was through a bank draft at a cost of £10. The receiving bank in the South would then charge a commission as well as its own (usually unfavourable) exchange rate – if you moved money from BOI North to BOI South that commission would be 1% of the overall transfer on top of everything else. Expensive.

AIB do thankfully offer an online cross-border transfer service. Transactions are completed through their Paylink service. Again these are performed according to the bank’s own unfavourable exchange rate. High Street banks rarely offer competitive rates to consumers; they make quite a substantial profit from the general public’s purchase of currencies that are initially bought by banks at a lower market rate on the interbank market. Unfortunately a standard charge of £15 applies to Sterling-to-Euro movements with AIB and a €15 charge is applied vice versa. Ulster Bank operate a similar scheme; you can make cross-border electronic payments but they will cost you £18.75 per transaction. These fees are still too hot for my blood; I want to move money regularly so need a cheaper option.

Our country’s banks should be able to provide us with this basic service for a reasonable price. They do not and so I was forced to explore less familiar options. I had only come across Paypal in the context of eBay payment options but it is championed online by foreign exchange enthusiasts. By establishing two PayPal accounts, one in Euros and one in Sterling, and attaching them to two different bank accounts, users can perform cross-currency transfers online for one of the lowest going rates. Paypal do not charge a transfer fee for this but instead will charge an extra 3% commission on top of market currency rates. This is still a reasonable rate. When looking at any transaction involving currency exchange it is important to take note of both the transaction fee and also the competitiveness of the exchange rate.

The most competitive options that I stumbled across were offered by online currency exchange companies, of which Xe.com appears to be the most popular. Xe’s service requires you to wire your chosen sum to them (which can be done online), for which there is no fee. They convert this to your desired currency at a very competitive rate, as the company specialises in foreign exchange and does not have to cover the same overheads generated by a bank. If you are changing Euros into Sterling you can even wire the exchanged money to your UK bank account for free, through Xe’s EFT service. If this seems too good to be true, regretfully it is. This free EFT process seems like a loss leader designed to attract customers, because there is still a charge to wire Sterling into an Irish account, and for many other types of currency exchange; only certain countries can avail of Xe’s services while avoiding some kind of transfer fee. But this fee is still low in comparison to what you would experience with a High Street bank. Xe also offer a draft option, where your exchanged money can be posted to your bank in draft form for free. This is a much slower method but since the majority of Irish banks do not charge a fee to cash Euro drafts, we are in the money; here, at last, is a low cost option for moving Sterling into Southern Euro accounts.

Bless the UK Post Office because they also offer a somewhat free service. No fees are applied when sending or receiving money from a post office account, transfers can be made online or by phone and they charge no commission on transfers. Their exchange rate, while not as competitive as currency specialists Xe, is at the time of writing reasonably good. My only issue with the Post Office’s service is that they require a £250 minimum transfer amount for every transaction; given that the median UK salary is only £26,000, this is quite a sizeable amount for the average Joe.

There are still other routes available, including smaller online companies and global banks with internationally-themed packages. However the majority of these feature tricky criteria, as with HSBC who offer free international transfers at a low rate only to Premier customers, those with a running balance of £60,000 or more. The other options that I have discussed are the most realistic and viable solutions for the Northern Irish taxpayer with Southern bills. It is frankly ridiculous that our own banks don’t offer this service for free – the customer should be entitled to expect this as a matter of course.

Proactivity a must when facing mortgage arrears

Most of us are all too familiar with the little mental sigh brought on by coming home to a small mountain of unopened envelopes. As a teenager I adored receiving post; now I am pleased when greeted with an unadorned mat beneath my letter box. Today any message of affection comes by email or text while the postman is commonly the bearer of bad news, the bringer of bills, eFlow notifications and loan payment reminders. It is easy to let these officious-looking envelopes build in an unopened pile.

However there is just no room for this type of behaviour in the face of the current mortgage crisis. At present one in nine homes faces repossession; that is just over 55,000 households at the last count. The debate continues as to whether Government intervention on this issue is both insufficient and overdue but the fact remains that people in mortgage arrears have actually been afforded some level of protection since 2009. Further safeguards were established with the introduction of the revised Code of Conduct on Mortgage Arrears at the beginning of this year. A crucial theme that undercuts all of this protective legislation is the need for mortgage owners’ vigilance and proactivity in relation to their debt.

The Code of Conduct on Mortgage Arrears provides a framework that lenders must follow in their dealings with borrowers who are in arrears or facing arrears with their mortgage. The aim of the Code is to avoid the repossession of family homes by putting in place alternative repayment arrangements for the mortgage where the borrower can’t make full payments. Though its provisions have been reasonably well publicised by Citizens Advice Bureaus and non-governmental organisations, many mortgage borrowers remain unaware of the protections offered by this piece of legislation. This is an awful shame because the Code is really the only route towards gaining some sort of peace of mind and preventing (or at least delaying) the repossession of a family home in the event of mounting mortgage arrears.

Among other things it requires that all mortgage lenders establish dedicated mortgage arrears support units in each of their branches, that they notify customers immediately of any arrears situation and most significantly that they negotiate some alternative temporary payment plan if the mortgage is at all viable. Alternative payment plans include interest-only payment periods, extensions of the overall mortgage period and even all out payment moratoriums. The Code also protects borrowers from the repossession of their family home for twelve months from the time that they fall behind with their mortgage payments.

Crucially, the Code requires that a person in arrears on their mortgage ‘cooperate’ with their lender. A lack of communication with a lender for three months or more will be considered as non-cooperation. This means that any mortgage owner who in fear and panic ignores communication from their bank for just three months could exempt themselves from the Code. Admittedly it is flawed piece of legislation and its weaknesses have been heavily criticised by commentators and debtors, but it is the only legal mechanism available that offers room for air to struggling mortgagees. The Code offers protection not just to those in arrears but also those in ‘pre-arrears’, people who are likely to fall behind with payments in the near future - again, the emphasis is on proactivity.

There is no ambiguity here; even when mortgage debts seem insurmountable it is obviously preferable to talk with your lender and give yourself a bit of breathing room. It becomes difficult to save the day the longer the problem is ignored. Lenders are reluctant to negotiate alternative payment plans with parties who have ignored communication for six months. Worse still, if you end up before the courts, a lack of willingness on your part to communicate with your lender casts you in a negative light; the courts do not look kindly on those who put their heads in the sand. So open those letters and contact your bank.