What about Mortgage Indemnity Guarantees for the bit > 80%?

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Brendan Burgess

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The Central Bank deals with this in their Consultation Paper

Treatment of mortgage insurance
: It can be argued that lenders wishing to make loans at higher LTV ratios than the cap and who have obtained an adequate form of guarantee from a highly credit-worthy guarantor for the excess of the loan over the cap should be allowed to treat this guarantee as allowing an exemption from the LTV cap. This would likely need to be a high-quality guarantee, for example provided by a highly-rated financial intermediary and payable on first demand. While the involvement of an independent mortgage insurance guarantor could help improve loan underwriting quality, and could protect the lender against default, permitting such an exemption would weaken the effectiveness of the macroprudential measure as a tool to dampen the pro-cyclical credit-price dynamics.



A recent Government strategy document indicated that consideration would be given to the concept of a mortgage insurance scheme. No details of such a scheme have yet been announced. Any such scheme would need to be carefully thought through in terms of its potential for resulting in fiscal costs as well as the risk that it could exacerbate housing price dynamics.

The Central Bank intends to consider further whether to introduce at a later stage a limited exemption for suitably insured mortgage loans.


And their consultation question:

Question 5: Should some adequately insured mortgages with higher LTVs be exempted from the measures and if so what should be the criteria for exemption?
 
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This is from page 44 of Construction 2020

[FONT=&quot]Other countries, such as the UK and Canada, have supported the development of “mortgage insurance” markets to support bank mortgage lending, particularly to First Time Buyers. Mortgage insurance allows banks to share the risk of mortgage lending, either with the public sector (the UK’s “Help to Buy Scheme”) or with private sector insurance companies (as in Canada), with the aim of increasing banking lending in general or to target groups.[/FONT]

[FONT=&quot]Mo[/FONT][FONT=&quot]r[/FONT][FONT=&quot]tgage insurance can also be used as an incentive to encourage banks to adopt standardised, prudent lending practices (income to loan ratios, high quality documentation etc.), opening up new and lower cost funding sources for the banks. The conditions of mortgage insurance can be changed in order to help avoid credit-fuelled property booms and busts.[/FONT]

[FONT=&quot]Consideration will be given to the concept of a mortgage insurance scheme and how it might benefit new housing completions in the Irish market. The objective of any scheme would be to ensure adequate availability of mortgage finance on affordable terms for new completions, particularly for First Time Buyers, as the economy recovers, and in doing so to provide the certainty needed to support greater levels of investment in new housing.[/FONT]

[FONT=&quot]The introduction of any such measure will be contingent upon the preparation of an Economic Impact Analysis (EIA) for consideration by the Minister for Finance. This exercise will be completed by the end of July. The EIA will assess the design parameters under which such a measure might best operate in the context of the Irish housing market e.g. limits on time, restricted to first time [/FONT][FONT=&quot]bu[/FONT][FONT=&quot]y[/FONT][FONT=&quot]ers/owner occupiers, focussed on new housing, the appropriateness of a price cap, regional/geographic restrictions etc. The EIA will draw lessons from mortgage insurance initiatives undertaken in other countries, including in the US, UK, and elsewhere in Europe.[/FONT]
 
Apparently Enda Kenny is going to be the white knight and bring in this type of scheme allowing first time buyers to have only a 10% deposit.
 
Dan O'Brien is strongly opposed to the mooted government guarantee of 10% of the mortgage over 80%.

Mortgage subsidy plan mad, bad and unjust


the frontbench is proposing counter-measures aimed at incentivising and subsidising borrowing which would undermine the Central Bank's new rules.Worse again, the government's proposal would leave taxpayers picking up the tab when people who borrow too much can't pay it back.
That the Government is proposing to incentivise and subsidise borrowing for property purposes beggars belief after all that has happened. If the Coalition could just about get away with claiming that the premature return to give-away budgets does not mean that it has failed to learn the lessons of past budgetary mismanagement, the mortgage guarantee proposal takes the biscuit when it comes to showing how little has been learnt about the dangers of bad bank lending.

and

the Taoiseach cited approvingly the Canadian government's mortgage insurance scheme. If that is supposed to provide supporting evidence for the plan, it doesn't.

Canada is one of only a handful of developed countries where the property bubble warning lights are flashing. While the country's subsidisation of borrowing in this way is certainly not the only factor in the large and protracted rise in Canadian house prices, it is a factor. Little wonder then that as recently as last May, the IMF suggested scrapping the scheme in an in-depth report on the risks of a crash in that country.
 
It looks like the politicians are coming to the rescue of the first time buyer.

From The Irish Times

Allowing first-time buyers to avail of mortgage insurance to plug the gap opened up as a result of the Central Bank’s proposals to increase a deposit to 20 per cent is a “good idea”, Minister for Finance Michael Noonan told the Dail this morning.
Mr Noonan said that he has asked a parliamentary committee to prepare a report on such an insurance, noting that it would be the private sector, rather than the government, that would offer it.
His comments come on the back of amove by the Central Bank to impose more stringent lending requirements, which, it is feared, will prevent many first-time buyers from getting on the property ladder. The Central Bank has proposed that it will increase the minimum loan-to-value of mortgage lending to 20 per cent, and cap the income multiple to 3.5, for the majority of mortgage lending.
Mortgage insurance is available in many countries but is currently used extensively in Australia, Canada, France, Hong Kong, Netherlands and the United States. It is an insurance product banks and building societies take out to protect themselves for any losses suffered as a result of a borrower defaulting on their mortgage and being unable to repay the outstanding debt with the proceeds of the sale of the property. US financial group Genworth Financial has in the past called for the introduction of such a product in Ireland.
While it is not yet clear how the product would work in conjunction with the proposed lending restrictions, in principle the product works by allowing a bank to lend 90 per cent of a purchase price to an individual. The individual then puts down a 10 per cent deposit, while a further 10 per cent of the mortgage is insured by a third party. The cost of the insurance is typically borne by the borrower.

http://www.irishtimes.com/business/...rance-for-buyers-a-good-idea-noonan-1.1988910
 
Honohan makes an interesting point about who sells the insurance to the Banks. Not much use having an private Irish company or a Fannie Mae/Freddie Mac type semi-state holding the insurance as the credit risk will ultimately fall to the taxpayer again in the event of another crash. It really should be an entity regulated by someone other than Ireland, so we don't get caught for the next bail-out.

This is the table of premiums for Canadian mortgage insurance

https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

From a quick read, they seem to operate a different system, insuring the entire value of the loan as opposed to the amount >80% proposed here. The premiums are quite high - but presumably the lending bank is left with zero credit risk after insuring your loan so competition would push rates (excluding insurance) to a very low level since this is essentially risk free lending. A consideration in Ireland would be the difficulty in realising security for a defaulting mortgage. An insurance policy that pays out when a loss is made by a bank selling a repossessed house is of little use if the bank can't repossess in the first place - making even insured mortgages risky propositions.
 
Holohan makes a very good point that by introducing insurance, they are merely moving the risk around.

Why not say that the 15% allowance on 20% deposits is reserved exclusively to first time buyers?

This has a danger of being watered down so much by the politicians that it becomes ineffectual. The last property crash isn't that long ago that we can't remember what happened...


Steven
www.bluewaterfp.ie
 
How is this different to the old indemnity bonds people used to have to pay for to protect the bank on mortgages over 80%?

They paid out if there was a shortfall on a sale but the insurance companies then chased the borrower for the amount paid out, protection for the banks but not for the customer. Is this going to be the same system?
 
Thee entire raisin d'être of these (proposed) restrictions is to ensure we don't have another property bubble. There are two interconnected components to a "bubble" - property-price inflation, and the risk to the financial sector from large-scale default in the event of a downturn.
The fact is that these controls tackle both components - much to the displeasure of both a financial sector that has learned nothing, and the speculative end of the building and development sectors who are just gagging to trouser the proceeds of property-price inflation.
Patience is a virtue. And it is particularly apposite here. If the Central Bank sticks to its guns, and the politicians don't undermine these sensible controls by idiotic and myopic "insurance" schemes, the cooling effect on the housing market will particularly benefit first-time buyers who will not be penalised by loan and demand driven house-price inflation if they wait until they have saved enough to buy prudently.
It is obvious from some of the commentary on Askaboutmoney money that it isn't just the speculators who would like a return to the 'good 'old days'b
 
Dan is a voice of sanity in the face of short-sighted self-interest on the part of the very coalition of banks, financial and property advisors, and property speculators, who would have us go down the same road that led us to perdition.
80% loans are standard in France - a country that has always had an orderly property market, and that avoided the disaster that befell us as a result.
However, I would not be opposed to a lower deposit requirement allied to a higher loan to earnings requirement. Or even imposing a non-recourse regime on loans that flout the guidelines.
The big worry, of course is that the Central Bank will give a nod and a wink to banks that ignore its guidelines - just like happened with the mortgage-resolution process.
 
Richie Boucher's views as expressed to the Oireachtas Committee on Finance

[Deputy Ciarán Lynch: ] This would permit lenders to loan above the loan-to-value rate of mortgages. I say this on the basis that some kind of mortgage insurance is in place, as is the position in Canada and the Netherlands. Canada is significant as it did not experience a housing bubble like Ireland. Will Bank of Ireland consider a different type of mortgage that will facilitate first-time buyers and meet the Central Bank's criteria? It would have to contain an insurance caveat.
Mr. Richie Boucher: We have operated in markets where there is insurance and it is something we will consider. One must be very careful when it comes to counter parties because one does not expect mortgages to go bad next year. Effectively, a person is taking a risk that the Central Bank does not want the person to take. If people are prepared to take the risk what will they be paid and will they answer if they are called? We have seen such markets operate and are interested in assessing such a proposal. If it can work we will participate but the counter party risk is an important consideration.


Senator Aideen Hayden: I welcome the witnesses and share Deputy Lynch's view on concerns relating to the Central Bank's statement on access to home ownership. I am interested in the comments that were made on an insurance product and it has been noted today that such insurance products were quite common in the 1980s and 1990s. The loan-to-value ratio was lower in those cases. I am concerned about the ability of people in contract employment to access funding. Could the witnesses come back to the committee on how such a product could work in the market? The Minister for Finance has asked the committee to consider the recommendations of the Central Bank and we should broaden our net as far as possible. The level of home ownership in Ireland is almost at an all-time low - it has dropped by over 10% in the past five to seven years and that is spectacular.
Mr. Richie Boucher: We would be glad to that. We can draw on the resources of some of our large shareholders. We will ask a large shareholder from Canada to give us the benefit of its knowledge as it is a big insurance company. It participates in such markets. Fairfax Financial Holdings is a shareholder and a big player in Canada. We will be delighted to assist and draw in resources from investors and supporters of the bank.
Senator Aideen Hayden: When he does this, perhaps Mr Boucher might give us his views on the scheme introduced by the UK Government on this - I think it is called the "begin to buy" scheme. Is it worthwhile? I ask for as broad a response as possible on this.
Mr. Richie Boucher: We can share our experience of the UK market.
 
The core rationale for this requirement is to avoid a scenario where the value of a PPR drops to the extend that it is in negative equity. This is most easily resolved by application of an insurance scheme which has been discussed both on this forum and generally. All indications are that there would be firms who would take on this risk at an affordable level of premium.
The issue has nothing to do with affordability, nor should it as the same rule would apply to a 100K mortgage as to a 1mln mortgage. I don't understand why there is a reluctance to apply this system or to seriously assess the option!
 
When I got my first loan from teh EBS there was this type of insurance. Can't remember it fully. But the cost of it was added to the mortgage if I recall, and it may only have been with building societies.

Why were these types of insurance ended? Was there something wrong with them. Did they protect the bank or the purchaser.

It's a mad place when the Central Bank tries to do the right thing, and the government tries to subvert that.

Unlike some on here, I think 10% deposit is fine. As long as the borrowing ratio are a reasonable percentage of the salary.
 
They were called indemnity bonds and were a feature of mortgage lending for quite a time. They were finally ended when competition started big time between the banks and building socities, initially customers paid for everything, valuation, indemnity bond, application fees, solicitors fees, then as lenders started to offer all or some of these things paid for as perks to gain customers the costs started to fall on the lenders.

To the best of my recollection that was when they scrapped insisting on indemnity bonds as now the lender was paying the premium themselves so they must have decided the risk wasn't worth insuring with house prices rising.

The indemnity insurance available at that time protected the bank not the customer, the customer paid the premium but the bank claimed on the policy if necessary and the insurance company then chased the customer for the amount paid out. I think this was a point that was never highlighted to customers at the time, I presume this new proposed scheme would be different.

I had a family member in the 80s property crash in UK, house bought for 50k with max mortgage, eventually sold for 30k, bank claimed on indemnity and insurance company started process of trying to recover the pay out from the customer, they hadn't a bob after the house disaster so never ended up paying it but were liable for it.
 
The core rationale for this requirement is to avoid a scenario where the value of a PPR drops to the extend that it is in negative equity. This is most easily resolved by application of an insurance scheme which has been discussed both on this forum and generally. All indications are that there would be firms who would take on this risk at an affordable level of premium.
The issue has nothing to do with affordability, nor should it as the same rule would apply to a 100K mortgage as to a 1mln mortgage. I don't understand why there is a reluctance to apply this system or to seriously assess the option!

Hi brendan

The version which has been sold in Ireland does not pay out to the borrower if a PPR falls into Negative Equity. If that were the case, it might be worth considering,although it would be very expensive.

The insurance which has been sold to date in Ireland covers the losses of the lender in the event of a default - and a default has meant repossession or voluntary surrender.

Genworth claims that they have also paid out to lenders for split mortgages in an effort to retain the borrower in their homes.

I have summarised the providers' presentations here

Submissions from providers of MII to Oireachtas Finance Committee

It is very expensive insurance.

For a €200k mortgage with cover from 80% to 90% i.e. a maximum loss of €20,000, the premium would be €2,000.

The overall objective of the proposals is " to increase the resilience of the banking and household sectors to financial shocks "

This does nothing for the borrower except to add €2,000 extra borrowing.



If the borrower loses their home, the bank may claim against the insurance company. But either the bank or the insurance company will still come after the borrower for the shortfall.



JLT did propose a form of insurance against a 30% fall in values. I haven't seen the detail of that. The conditions of payout and who would benefit. I suspect it would be very expensive.
 
The issue has nothing to do with affordability,

Some of the lenders and the brokers are arguing that there should be no LTV limits. That the only issue should be the LTI ratio.

I think we need both - The LTI covers affordability, the LTV covers both affordability and safety.

If I can show that I have saved up 20% of the value of a house, then I have demonstrated some form of affordability, through financial discipline.

If I pay 20% of the cost of the house, my repayments will be lower.

If I pay 20% of the cost of the house, I will be less at risk of having a shortfall if I get into trouble.

The existence of MII does not help me in any way. In fact, it makes it worse. It encourages me to borrow 90% when that is generally not a good idea.
 
However provided that the insurers medium term ability to cover the 10% potential payout is adequately assessed then there is no logical reason for excluding MII cover as part of the overall LTV limit. I.e. In both circumstances the risk of a >20% reduction in property price is covered.

It seems to me that you are looking at this from the lender's point of view. Of course the lender would love to be able to lend at 4.5% and get the customer to pay a premium for 10% loss. (I suspect that the lender would pocket a big lump of the premium in commission as well)

But MII does not help the borrower unless you consider allowing them the right to borro recklessly to be an advantage.

I get back to my main point. If the Central Bank decides that 90% is the appropriate, prudent level of lending, then they should allow it. There would be no need for MII.
 
I acknowledge that Brendan and I am looking at this from the lenders perspective. I.e. in a default scenario.
It might seem that I am somewhat blinkered in my approach on this but to be fair I can see no real benefit in the new LTV limits for the following reasons:
1. Loans are not reposessed because the value of the underlying property has fallen. There is no correlation between LTV and mortgage affordability.
2. Property Price Index over long periods of time has universally risen. The recent drop has been due to disasterous banking economic circumstances and as can be seen many of those who retained affordability have kept paying their mortgages. Over a 10 year period even including the recent dramatic drop period I would still see this index not showing any dramatic decrease (excluding arears where oversupply was clearly evident).
3. Provided that the quality of overall risk assessment was maintained at a high level MII providers would be taking on a low risk and this together with large increase in clients should result in affordable policies. The major risk would be in the first 3 years of the term and this would likely attract competitive providers.

I agree that MII provides no great benefit to the home owners, other than covering a 10% loss in value of the home. However from my own perspective I would consider sustainability of employment/salary as being the major risks in providing finance. In the banking sector we always regarded "repayment risk" as being the main factor in loan assessment. Colateral (literally translated as "alongside with") was always regarded as the braces in the belt and braces assessment. Unfortunately the transgressions which led to collateral based lending in the mid noughties tried to prove that times have changed and historical assessment was no longer relevant!.
 
It seems to me that you are looking at this from the lender's point of view. Of course the lender would love to be able to lend at 4.5% and get the customer to pay a premium for 10% loss. (I suspect that the lender would pocket a big lump of the premium in commission as well)
I'm not and never was an advocate for the Banks. However, I do see the logic and rationale of risk based pricing, whether that be in banking or insurance.

I get back to my main point. If the Central Bank decides that 90% is the appropriate, prudent level of lending, then they should allow it. There would be no need for MII.

Now you have it! I have no argue ment with your requirement for a savings record. However you would need to account for the renter and CB are not intending to include any requirement that the 20% deposit is saved nor that its' not borrowed! These are blinkered rules which in themselves will not add anything to prudent lending practises.
 
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Is the benefit to the borrower not in the form of a lower interest rate on the mortgage.

Fundamentally (in a competitive market) interest rates are a function of 2 things: the risk free rate and a risk premium. The riskier the proposition - the higher the rate a lender will demand. In the current mortgage market, the credit risk is borne by the lender and their mortgage rates (presumably) reflect this. The fact that lower LTV mortgages are priced lower than higher LTV mortgages indicates that bank's pricing is risk sensitive. The effect of the mortgage insurance is to transfer some (quite a large proportion of?) of the credit risk arising from a mortgage to this insurance company in exchange for a fee. The insured mortgage entails much less credit risk than an uninsured mortgage and if banks are competing for business, then mortgage rates should decline to reflect this.

Whether the Irish mortgage market is competitive is open to question at the moment.
 
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