A first draft of my submission

Brendan Burgess

Founder
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I have summarised my current thoughts on this proposal. These are still evolving.

Summary
· I agree in principle that borrowers have to be protected from engaging in reckless borrowing and lenders must be protected from engaging in reckless lending
· The proposed limit of 80% LTV with 15% exceptions seem about right.
· The proposed limit of 3.5 times earning with 20% exceptions seem about right.
· I agree that such protections will reduce the risk of boom and bust in the housing market which is good for everyone
- The existing system disadvantages borrowers who are naturally prudent as reckless borrowers can outbid them and push up prices. Forcing everyone to be prudent restores the balance.
· The key problem in this area at the moment is the shortage of housing for buyers and renters. These measures are likely to exacerbate the problem.
· The second key problem is the artificially high variable mortgage rate in Ireland. This should be a higher priority for the Central Bank to tackle
· The limits should not be set in stone. The Central Bank should be able to vary them according to the variations in the borrowing, banking and housing climate
· If limits are introduced, they should be phased in. A sudden jump from 10% to 20% deposit could be very disruptive and unfair to those who are almost at their 10% goal
· It will be very difficult for first time buyers to get on the housing ladder.
· First time buyers who qualify for the exceptions may benefit unfairly from these proposals, in that many of the competing buyers will be eliminated from the market.
· The LTV and LTI criteria should be integrated. A borrower should not be able to borrow 90% LTV and 3.5 times their salary. But if someone has a deposit of 30%, maybe they can borrow 4 times their salary. Likewise, someone who is borrowing just twice their salary, could be allowed a 100% mortgage.
· Likewise, if someone does borrow 90% LTV, their income should allow them to make capital payments to reduce the LTV to 80% within 5 years.
· Allowing exceptions to the rules is an excellent idea but there should be an overall limit of 20% exceptions and the banks should be allowed to determine whether to use it for the LTI or the LTV cases
· Mortgage applicants should be required to pay off all unsecured debt before applying for a mortgage. Otherwise people will build up their deposit while borrowing for cars and holidays. or Unsecured debt should be deducted from the deposit when calculating the LTV
· The new rules and uncertainty about getting mortgages will force borrowers to build up a deposit by artificial means
[FONT=&quot]o [/FONT]People will avoid contributing to pension schemes
[FONT=&quot]o [/FONT]People with existing mortgages in negative equity will not pay them down
[FONT=&quot]o [/FONT]People will borrow to buy a car instead of using their savings
· The Central Bank must resist political pressure to introduce Mortgage Indemnity Guarantees
[FONT=&quot]o [/FONT]It will be a big expense for the borrower
[FONT=&quot]o [/FONT]It will provide no benefit to the borrower
[FONT=&quot]o [/FONT]There is a significant risk that the insurer won’t be able to meet the claims in the event of the occurrence of the risk which is being insured
 
Brendan, I broadly agree with your ideas. A couple of thoughts for you to consider:
- another group deserving of protection are the prudent buyers who might be priced out of the market by reckless (or desperate) borrowers;
- perhaps there should be some little flexibility on the 20% deposit for borrowers whose savings have been constricted by having paid an unavoidable high rent for a long time;
- I agree that some thought should be given to what people do to maximise their deposit, particularly if it involves some desparate measures. But paying off all unsecured debt is slightly too strong a suggestion - I wouldn't go to the wall over relatively small debts, or even a car loan if the amount borrowed is reasonably in line with the borrower's general standard of living.
 
From a borrower, lender and a policy perspective, whats the purpose of the deposit for such a long term asset?

I think the focus should be on ability to service debt based on certain criteria and not on a deposit.
The issue with the boomtime 100 % LTV was less about the 100% but the reckless income multiples used.

Yes a deposit is needed at contract signing to lube the process, but 10% should do that.

Re those who espouse 20%:, why not 25, 29, 31.25, 33.2, etc?

Is there a rigorous analysis crunched on Big Blue behind this or is it just lazy, intellectually bereft policy?

PS:, as to the various exceptions, this is the worst form of policy formulation.

These will be abused and manipulated by the banks to drive a coach and four through the rules.

I have seen this at first hand right back as far as Basle I in finance and similar carryon in the oil and gas industry.
It just doesn't work and gives both the regulator and the banks far too much wriggle room.
 
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I think measures should be taken to minimise the knock-on effects on the rental market.
 
other borrowings is already taken into consideration by the lenders own requirements and it has a big effect on the amount that can be borrowed.

Banks are only lending to prudent savers. The Central Bank paper is because the Central Bank don't trust them to carry on in this manner in the future.

The shortage in housing in not a Central Bank issue. Their issue to minimise the risk and the effect of reckless lending. There is nothing they can do about builders not building houses.


Steven
www.bluewaterfp.ie
 
The shortage in housing in not a Central Bank issue. Their issue to minimise the risk and the effect of reckless lending. There is nothing they can do about builders not building houses.

Hi Steven

They have made this point themselves, but they can exacerbate it by their actions. We need coordinated policies. We can't have the different organs of state acting in their own silos.

Brendan
 
Brendan

On your point

· 'The second key problem is the artificially high variable mortgage rate in Ireland. This should be a higher priority for the Central Bank to tackle'

While I completely agree I don't think the Central Bank are 100% to blame on this. While I appreciate that they can regulate on variable rate margins, banks have a valid argument that without a functioning repossessions process these higher rates are needed.
 
Hi TRS

I am not at all suggesting that they are 100% to blame. But they share a lot of the responsibility as they have been lying about the true rates for some reason.

Brendan
 
Hi Steven

They have made this point themselves, but they can exacerbate it by their actions. We need coordinated policies. We can't have the different organs of state acting in their own silos.

Brendan

Hi Brendan

I do agree that coordinated policies are required but then there's the developers. They are quite happy to wait for the prices to sky rocket before they turn a sod. They can't wait for the days of having everything sold off plans again.

What are the government going to do to get them building again? Give them tax breaks? Even if they do start building, it will be a couple of years before people can draw down on their mortgage as the sites are all empty fields right now.

Steven
www.bluewaterfp.ie
 
The limits should not be set in stone. The Central Bank should be able to vary them according to the variations in the borrowing, banking and housing climate

It seems to me that the only long term advantage of these proposals would be if the limits were to be set in stone.

Otherwise the political pressure to make pro-cyclical adjustments to the limits will be irresistible.

At some point in the future when the economy is going well and house prices are rising on the back of plentiful employment and increasing wage levels.

Many people with jobs and prospects will struggle to raise the 20% deposit. Can you imagine the pressure that will be brought to bear to reduce the artificial 20% deposit requirement.

When that pressure prevails there will be a house price explosion, and the boom will just go on getting boomier.

Sorry Brendan but I am extremely disappointed with this point. For me this is the big thing we should have learned from the recent past.
 
The LTV and LTI criteria should be integrated. A borrower should not be able to borrow 90% LTV and 3.5 times their salary. But if someone has a deposit of 30%, maybe they can borrow 4 times their salary. Likewise, someone who is borrowing just twice their salary, could be allowed a 100% mortgage.
· Likewise, if someone does borrow 90% LTV, their income should allow them to make capital payments to reduce the LTV to 80% within 5 years.
· Allowing exceptions to the rules is an excellent idea but there should be an overall limit of 20% exceptions and the banks should be allowed to determine whether to use it for the LTI or the LTV cases
· Mortgage applicants should be required to pay off all unsecured debt before applying for a mortgage. Otherwise people will build up their deposit while borrowing for cars and holidays. or Unsecured debt should be deducted from the deposit when calculating the LTV
Boss, in general I agree but I am not sure about this integration point. The two tests serve entirely different purposes. LTI is about ability to repay in the normal course. LTV is about the ability of the borrower to get repaid in the event of default and by premise that will not be from the lender so it doesn't matter what her other debts are. Thus it should not matter if the deposit has been borrowed on credit card. That is the credit card company's problem. The mortgage lender is only interested in being able to salvage the situation on default. Of course a large CC debt might hamper the borrower's ability to repay in the normal course from income but that is a somewhat different matter. In theory we should not be talking about LTI but about LTDI. Loan to Disposable Income after all outlays.
 
Crime egg:

I agree. Experience shows that any wriggle-room allowed by to the banks would be used to drive a coach and four through the restrictions.
The restrictions need to be set in stone, and the cudgel of non-recourse used to beat them over the head so they, and not the borrower, will have to bear the risk of stepping outside the guidelines.

However, my big worry is that the Central Bank will be just as lax in enforcing the guidelines as it was in enforcing its mortgage-resolution targets when the banks just laughed, gave the CB the two-fingers, and did as they pleased.
 
I find it interesting that, in the middle of an acknowledged mini-boom, when % rates will never(!) again be as low again (0.05% ECB) - and which can therefore only go up, making any (non-fixed rate) purchase only more expensive to repay - people are actually complaining about restrictions being put in place. Will we ever learn.

Secondly, as soon as ECB % rates do begin to rise (though I accept that could be years) houses will get cheaper.

Finally, (& admittedly slightly off topic) I find it incredible that people are up in arms trying to save a couple of hundred € over water, when BofI & AIB (of whom we own 90%+) are borrowing money from the ECB at less than 1% and lending it into the mortgage market at around 4%. This is legalised theft. Those on variable mortgages and moaning about water charges could instead save €000s if they got those mortgage rates down.

D.
 
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