Do you remember the ad in which a bloke on the top floor of a Dublin bus stands up and admits to all the passengers: “I don’t know what a tracker mortgage is”? He stands up, unsure of himself, and makes his public confession, half-petrified. You can see the relief on his face as he admits that he hasn’t a “rasher’s”.
The magic of the ad is that it captured the confused thoughts of the average punter on the bus going to work in an era when everyone was using financial jargon, pretending they knew what it meant, but was scared stiff to confess that they had no idea what they were talking about. No one wanted to admit that they weren’t up to date with the new lexicon at a time when they were being bamboozled by incessant financial propaganda.
Once one guy stands up, he gives permission to others on the bus to admit that they are equally confused. This became a cult ad, with people all over Ireland standing up randomly on buses, confessing that they had no notion what was going on around them financially.
By locating the ad on the top floor of a bus, it reinforced the notion of ordinary people making extraordinarily important financial decisions without full knowledge. People were borrowing multiples of their incomes to buy houses because they were constantly warned about being left behind. And right in the middle of this madness was the tracker mortgage, which was marketed as the solution to the lack of affordability because the interest rate on a tracker was among the lowest possible. It tracked the European Central Bank rate, with a tiny margin of 1 per cent.
(Most people forget that the purpose of the ad was to reassure us that while we might have been perplexed, the Financial Regulator was in control, so we need not worry!)
The tracker mortgage spread like a virus through the homes of Ireland from 2001 to 2007.
When the tracker virus crossed into the general population, it multiplied extraordinarily swiftly. Today, the figures are startling and reveal the extent of this financial pandemic and how it infected the population.
Today, trackers account for 60 per cent of Permanent TSB’s €26 billion Irish residential mortgages. Trackers make up 54 per cent of AIB’s €27 billion book and 23 per cent of the €16 billion book at its subsidiary, EBS. Some 62 per cent of Bank of Ireland’s €28 billion book are trackers.
All told, that works out at €51 billion, or about 52 per cent of residential mortgages at the four main banks. A higher proportion of buy-to-let mortgages, about 70 per cent, are on tracker rates.
About 85 per cent of trackers were lent between 2004 and 2008 when they financed most of the new estates built in our suburbs.
The trackers were injecting 51 thousand million euro of new credit into the market. This prompted builders to keep building and, as the trackers grew and grew, so did house building.
They moved in tandem, the tracker and the hysterical end of the property splurge.
In my latest book, The Good Room, I term the part of the country financed by cheap mortgages “Trackerville” and, like another of my terms with which you might be familiar, “ghost estates”, Trackerville will be the scene of much financial hardship in the years ahead.
The number of people affected is staggering. The tracker went from 0 per cent of all Irish mortgages in 2001, to 15 per cent in 2004 to more than 50 per cent of all mortgages by 2008.
The banks knew they would lose money on trackers, but were confident that, once they had you on a tracker, they could make money in Trackerville by lending more money to you for car loans, kitchen extensions or holiday finance on top of your overdraft and credit card.
But now that has all gone pear-shaped. The banks are de-leveraging. This means they have to take in more deposits than they are lending out and, crucially, they have to make a big margin between deposits and loans.
This means that, even if their loan book had a normal structure, banks in Ireland would have to minimise deposit interest and maximise loan interest. This implies a huge credit crunch.
Now consider the credit crunch when 50 per cent of the banks’ mortgage books are trackers.
In “normal” de-leveraging conditions, the credit crunch is bad, but when there are trackers involved, it implies that the banks have to charge even more interest on the loans that they make.
On the other hand, they have to try to pay as little interest as possible on deposits while at the same time attracting deposits. The reason they need deposits is because they have to get their loan-to-deposit ratio, which went ballistic in the boom, back to prudent levels. The trackers serve to penalise those people who don’t have trackers, which is why we are seeing variable rates rising all the time, even as the base eurozone interest rate is cut.
In addition, the trackers imply that the rate of interest charged on new business loans, for example, will be higher than might otherwise be the case. This implies that the credit crunch which small businesses are suffering can’t ease as long as the trackers continue.
But, of course, if you have a tracker, you are hardly going to worry about these concerns. For hundreds of thousands of mortgage holders, the cheap tracker rate of interest (which fell last week) is the only thing between them and default and eviction.
Therefore what we are seeing is a type of financial apartheid in Ireland. Those on trackers have special treatment – they are the white South Africans of the credit world. Those who are on variable rates or are looking for credit to keep their businesses going are the black population, discriminated against in banking and credit.
Ultimately, the domestic economy can’t recover under the credit apartheid regime because, for the economy to grow, credit has to be reasonably priced.
In the longer term, the trackers pose a twin dilemma for Ireland. In the short term, recovery is strangled by the effect of tracker mortgages on bank lending and banking behaviour. In the longer term, like the apartheid regime, the day of reckoning for trackers will come.
If the European economy ever recovers, the Germans will insist on interest rates moving up swiftly to pay its savers, who are seeing their income from saving wiped out as interest rates keep falling.
What happens to the ability of hundreds of thousands of Irish people with trackers to meet their mortgage payments when interest rates rise to their long-run average of 4 to 6 per cent?
Clearly we will see mass defaults across Trackerville and these defaults will be unique to Ireland because they will be happening when the rest of the eurozone is recovering strongly.
If anything shows you just how damaging the banking policies of 2000-2007 actually are, it will be the sorry story of the tracker mortgages for the course of their 20 to 25-year life.
If the black propaganda we’re getting used to extends to trackers, people will be afraid to admit to having one because they’ll be seen to be subsidised by those with “proper” loans. A kind of welfare state mortgage.
Subscribe! Woo whoo!
I liked the article. Maybe it might be a good idea to suggest to the owners of trackers to aggressively pay down their mortgages to percent the calamity when the germans hike the rate.
I think the Germans will be out of the euro by then,
David, why are the prudent always being targeted for blame. The ‘trackers’ were available to everyone, and anyone with economics in mind figured out that the ‘tracker’ was the best option. It’s hardly fair to persecute the people who took these up. And now they are being pitted against the ‘variable’ mtg holders, just like the private sector is being ruthlessly pitted against the public sector, the majority of whom are regular Joe Soaps on regular wages. I wager you would find, that the people who took up the ‘trackers’, did so for only one property, and did not gamble… Read more »
We need a sketch from the top of a bus “I don’t know what my PAYE, PRSI, USC, VAT, etc.. is for….” in respect of the way the state has become a debt collection racket for the bankers pulling the policy strings in Brussels.
Of course in retrospect, the banks had no clue what a tracker mortgage was either – in terms of it’s consequences.
And yet they pretended to be the experts.
It looks like “our” crooked banks will be looking for more money.
Of course, if the banks cannot get the loans to deposit ratios fixed, they will not be allowed issue new loans thanks to regulations like Basel. And the ECB are actively discouraging saving by means of their interest rate policy, resulting in malinvestment in the stock market and other sectors instead. Meanwhile consumers save more because they cannot be certain of having sufficient money for the rainy day in a low interest rate environment. And the government taxes whatever the interest return is, with DIRT tax. The banks are unable to prop up the real estate market. The Irish real… Read more »
DmW you’re just demonstrating the irrationality of the present monetary system not how to fix it. The USA supported the white banking system in South Africa while most of the world was not but yet no one boycotted the USA and no one boycotts them now while they (Obama) bomb children with their drones and melt the skin of babies. It’s nice to see the not so rich get some solace – ‘those on the buses’. Demonstrating the senselessness is worthwhile but a suggested of fix may be a more positive way forward, so what do we do? Change the… Read more »
The apartheid analogy is flawed as the ruling clique in South Africa had explicit political power to enforce their regime’s demands. No-one forced people to take out tracker mortgages, although the absence of a quality rental market in property may have forced some to drink the Keltic Kool-Aid: “The job of the Federal Reserve, he famously said, is “to take away the punch bowl just as the party gets going,”–that is, raise interest rates just when economy reaches peak activity after a recession.” Note well, these words of Wiliam McChesney Martin and return to them when the ECB gets mediaeval… Read more »
A certain Danish bank gave out ECB rate plus 0,5% tracker mortgages in the boom, some of which are interest only with a pay back of capital at the end of thirty years. They are now inviting their beloved customers in for chats about paying off some of the capital early in advance and meeting with polite refusal due to the state of the economy. There is something rotten in the bank from Denmark. I thought Draghi offered all EU banks funding at the ECB base rate for at least two years recently . LTRO? This means they shouldnt be… Read more »
so bank of ireland still not a buy then, you made a convincing argument not to invest in the banks. So the ECB really holds all the cards and the fate of irish banks still depends on ECB decisions. Will the ECB do like the bank of japan is doing with aggressive monetary easing and money printing to reduce the value of the euro
A gun made with a 3D printer, coming to a village near you
http://www.thedailybell.com/29047/Anthony-Wile-Antal-Fekete-Gold-Backwardation-and-the-Collapse-of-the-Tacoma-Bridge To get a handle on the economy of the world , this is an enlightening read. Are we in fact in an ongoing deflatioary spiral to the complete debasement of all currencies to and age of barter. From which will spring a new gold standard and a real bills doctrine. Antal Fekete… “As far as the future is concerned, the importance of real bills must be seen in the light of the inexpedience of barter in a complex economy. People will want to trade; they don’t want to barter. After the demise of the dollar, in the absence of… Read more »
Alternative to the traditional property ladder. Like many in my circle we have been patiently but reluctantly renting on the sidelines of the (hyperbole of ‘ordinary people doing the SENSIBLE thing’ claptrap) boom, biding our time through the inevitable bust, till the day house prices become affordable (national wage x 3). That’s a LONG time renting, but in relation to the inflated property market we ‘ordinary’ people in our circle decided it was the sensible thing to do. Well, frankly, we’re losing patience. At this rate of price decline we’ll all be six feet under in the renters graveyard. Now… Read more »
Hi Adelaide, That is an interesting concept. I think, we in Ireland, have this long well covered to prevent people doing things themselves. A bit of land with planning permission is actually quite expensive and/or unaffordable to many young families. There are all sort of rules and regulations to stop people selling and buying land willy nilly. I am not familiar with Kerry but hopefully this is not a problem for you. From my own recent experience I know that in my area an architect is required to get the planning permission for a construction that is somewhat unconventional. There… Read more »
Financial Regulator now there’s a name,it feels like that name should have changed to the fool on the hill.
If trackers go up to 5/6 percent will the banks go bust or will another bail out take place it feels like it will be so.
Banks need to shed thousands of jobs at a time when we should be holding on to as many
jobs as possible.
Trust with banks is gone I wonder how many people sold there houses at a good time and while waiting for the house prices to go through the floor bought bank shares.
”The reason they need deposits is because they have to get their loan-to-deposit ratio, which went ballistic in the boom, back to prudent levels.”.
Glad to see it’s not because they lend out other people’s deposits.
When the banks here start to run out of money ,it stands to reason they will go after there deposit savers aided by the government .
I don’t know if anyone can remember the ads around 2007/2008. Some banks are particularly active with their ads to create guilty feelings on the parents. These banks were insinuating that parents should do the right thing for their children. Parents should give their children a chance to get on the property ladder by releasing equity on their own house. This was all allowed by the so called policing bodies and our government. And when the full-blown crisis is so in your face I was phoned a couple of times by my bank to ask if I was interested in… Read more »
The highlight of this article is that it shows how uniform European policies are acting like a wrecking ball on the rest of Europe. The Euro distorted real prices and real value of labour and property. The fix for the resulting mess is about taking back the toys the poor unwashed were not supposed to have in the first place. The general lack of backlash (or announcement of same) suggests no one cares or few are that bothered. So life will proceed as normal. Maybe it is the blind belief in that sustained normality is what keeps the show on… Read more »
This is important !!!!!!!!!!!!!!!!! The blog site NAMA Wine Lake, is being threatened by legal representatives from NAMA. http://namawinelake.wordpress.com/2013/05/05/how-paul-tweeds-johnsons-solicitors-are-trying-to-muzzle-the-namawinelake-blog/ David, Can you pass this to Brian Lucey (who is also a massive critic of the NAMA quango) and Constantin. And do not publish any recognition that you are doing so on this site. To do it silently, is preferable. NAMA are being unaccoutable, as usual, like most of the institutional state complex in this country. In fact they are even trying to shut people up, for talking about NAMA. This has gone beyond the absurd. The Laws in this country… Read more »
OK – It is well known that the country has a problem with tracker mortgages, but a commercial bank’s blended cost of funds has always been higher than the central bank marginal lending rate (in a normal banking environment), given the mix of funding sources (deposits / interbank / structured vehicles / equity etc). So when ECB rates rise, this will be felt hardest, initially, on non tracker mortgages. as their cost is based on a margin of say 4.0% over ECB rates, (right now ECB @ 0.5% and most variable rate mortgages are circa 4.5% I guess) – if… Read more »
does Julius Ceasar have a solution to the current debt crisis. Some things just never change!
And what about this :
Tenants must be protected in repossession cases – Doherty
Fears grow that the Land and Conveyancing Bill will lead to a significant number of repossessions of buy-to-let properties that could lead to an increase in homelessness. During the boom, banks issued over 150,000 buy-to-let mortgages. Today more than 30,000 of these are in serious difficulty.
The point here is the Gov’t must step in to protect tenant agreements. I know DMcW has covered the statistics before.
The state has a vested interest in property values with the valuation tax, 0.18% probably rising to 0.207%. So now, there is a good economic arguement for the state to the buy up boom time variable mortgages and lend at affordable rates, e.g. not rock bottom rates, but perhaps 3 to 4% maximum. I think something similar happens in the US homeloan market with Fanny Mae. Governments supporting accomodation costs is nothing new around the world. In the UK the government is now helping with home loan deposits. Germany has rent control which is a form of state subsidy for… Read more »
The property market seems to be heating up again & there seems to be a real scramble for certain houses with protracted overbidding despite the property tax, increased salary taxes etc. I hvnt figured out yet if this is a temp trend or the start of a new bubble. People seem to be losing the run of themselves again. Any thoughts?
Off the subject, I know, but here is an analysis from Serge Halimi in this months Monde diplomatique, ‘ Tyranny of the one per cent’.
If I have understood your Glass-Steagall at all, I think this is the result that came about in France with their so called laws of speration, or ‘ La régulation bancaire’, as its called.
I havent put it up before as it’s in French, so all the best with translation.
“Therefore what we are seeing is a type of financial apartheid in Ireland. Those on trackers have special treatment – they are the white South Africans of the credit world. Those who are on variable rates or are looking for credit to keep their businesses going are the black population, discriminated against in banking and credit.” I think this is an interesting phenomenon and deserves discussion. 1. A lot of very diverse borrowers would have trackers. Some would be still in good jobs, making good money, doing nicely, and the tracker might at least partially compensate for their CURRENT state… Read more »
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