Broad welcome for proposed 80% limit from public interest groups

Brendan Burgess

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The Oireachtas Finance Committee met with "public interest groups" to get their views on Mortgage Indemnity Insurance.

To the surprise of the TDs and Senators, the following 4 speakers broadly welcomed the Central Bank's proposed 80% limit.

Brendan Burgess - consumer advocate and founder of Askaboutmoney.com
Paul Joyce - Policy Analyst - Free Legal Aid Centre
Ross Maguire - Founder of New Beginning
Professor Ronan Lyons - TCD Economist

The meeting also heard from Karl Deeter, commentator and mortgage broker who said that the Central Banks proposals were not necessary. Karl's views are reported here:
Mortgage expert warns on ‘wrong medicine’ for housing market



Although the meeting was to discuss MII, the most important and surprising issue to emerge was the support of 4 consumer groups for the Central Bank's proposed 80% limit, so I will confine this report to that issue.

My presentation is attached to this post,and I will post the transcript when it is available.


  • There is a perception that the Central Bank is trying to penalise first time buyers by denying them access to buying a house. In fact these proposals will benefit first time buyers more than they will harm them.
  • The 80% limit is about right but it should be phased in and not simply imposed on 1 January.
  • It will be difficult for FTBs to save up for a deposit of 20%, and so they should be allowed to save through their pension fund for the deposit. The tax-free lump sum on retirement would be adjusted for any amount taken early for the purchase of a home.
 

Attachments

  • Opening comments to Oireachtas Finance Committee on Mortgage Indemnity Insurance Brendan Burges.docx
    21.7 KB · Views: 60
Ronan Lyons

The 80% figure is the right figure.

It should be phased in, probably by 1% a year from 90% down to 80%.

The main problem facing first time buyers is the high cost of new housing.

The way to address is to try to reduce the cost of building houses and not to increase credit.

Increasing credit simply increases house prices but does not increase supply. (BB questioned this)

A 5% increase in LTV limits would probably result in a 10% increase in house prices, so a 5% reduction in the LTV limit would result in a 10% fall in prices.

The very high specifications for new houses has pushed up the cost of building houses e.g. No apartments could be North facing

“The direct effect of mortgage insurance is going to be to increase prices relative to rents and relative to incomes; I don’t think that’s in debate. If you give more people more credit, the first most important thing to happen is that prices go up relative to rents and relative to incomes.”

If we introduce a Loan to Value limit of 80%, we won't need a Loan to Income limit. An LTI limit can become a target. A 3.5 times limit might not be enough for someone to buy a house in Dublin, but could be too high for a house in Cork. ( BB questioned this)
 
Ross Maguire (as summarised by the Irish Times)


Ross Maguire, senior counsel with the New Beginning group working on insolvency and debt-resolution issues, said the proposals on loan-to-value ratios were “not designed to punish first-time buyers” but to stop banks becoming involved in reckless or improvident lending again in future.

He said the Central Bank had a “role and a duty” to ensure the mistakes of the past are not repeated.

“Unless the market is regulated, unless credit is restricted we will inevitably fall back into a credit-driven bubble and it is that I think that the Central Bank are seeking to guard against.”

However, he raised concern over mortgage indemnity insurance: “I would be concerned that a scheme like this will create a gap in the hedge to allow banks avoid regulation...and then ultimately in five years time we see crazy lending happening again”.
 
Paul had a written submission which is attached

[FONT="] the Bank states in its Paper that the proposed 3.5 times loan to income (LTI) ratio is calculated to generate a gross debt service ratio of about 30% and a net debt service ratio of about 40%.[FONT="][1][/FONT] The Bank therefore appears to be suggesting that mortgage servicing costs should not exceed 40% of take home pay and this is one of the rationales for its proposed LTI ratio. By the barometer of international standards, this might even be considered above an acceptable level, with a maximum of one-third of net pay being a frequently cited benchmark. However, further insurance costs that a borrower has to cover will further reduce disposable income for living expenses and accordingly may threaten the affordability of such mortgages in the long run, in addition to the other unsecured debts that a borrower will often have to service. [/FONT]
and


... it would seem that not everyone in Canada shares the same enthusiasm for Mortgage Insurance Schemes. A recent article in the Globe and Mail,[FONT="][1][/FONT] notes that a mortgage insurance framework is one of 75 action points that the Irish government is looking at to reinvigorate its construction industry. Commenting on the Canadian experience, it suggests that ‘the bank is required to buy the insurance but it makes the home buyer pay the premiums. The insurance pays the bank back if the home buyer defaults – the buyer loses their house, while the bank recoups everything that was owed on the mortgage. The insurance therefore encourages banks to lend bigger and riskier mortgages than they otherwise would.’

It also sounds some other warning notes that may be useful to the Committee in its deliberations. It suggests that Canada might benefit from lessons that Ireland has learned the hard way. These include ‘the dangers that stem from a lack of adequate data to study the housing market, the dangers of promoting the idea that home ownership is almost always preferable to renting, the dangers of relying on construction for economic growth and, importantly, the dangers of assuring people that a soft landing is on the horizon’.
 

Attachments

  • Opening Statement - Mr. Paul Joyce.docx
    25.4 KB · Views: 24
Responses from the Committee

I was the first to speak, and there were only three members of the committee present at that time: Senator Aideen Hayden; Senator Thomas Byrne and Deputy Pearse Doherty.

Other TDs and Senators attended parts of the meeting: Tom Barry; Kierán O'Donnell; Seán Barrett; Peter Matthews; Senator Gerard Craughwell

Thomas Byrne:
I got the impression from our discussions with the lenders and industry and from the media generally, that MII was a no brainer. It's interesting to get the opposite view.

Pearse Doherty:
People are quoting Canada as a model for how we should run the mortgage sector. They are heading for a big bust as well. They should learn from our housing crisis.

Tom Barry (FG Cork)
This is a problem for Dublin. The 80% LTV limit is not a problem in Cork. The average Garda married to a nurse can save up the €30k necessary for a 20% deposit on a house costing €150,000 in Cork.

Peter Matthews:
A house in Dublin which rents for €1,500 a month costs €400,000. If you value this on a rental yield basis, it is worth just €270,000 ( 270k@7% = €1,500 a month)

Therefore house prices are overvalued by 30% and will fall.

The problem is too much credit.

(He made a long speech so the above is only my summary. I presume he supports the minimum 20% deposit if he thinks house prices are overvalued by 30%)

Kierán O'Donnell
If we impose a 20% minimum deposit, we will be excluding people permanently from the housing market.

Young people don't have money in their pension funds so allowing them access to their pension funds won't help. (To which I replied that if they knew that they could access their pension fund to buy a house, they would start contributing to their pension funds)
 
To the surprise of the TDs and Senators, the following 4 speakers broadly welcomed the Central Bank's proposed 80% limit.

Thomas Byrne:
I got the impression from our discussions with the lenders and industry and from the media generally, that MII was a no brainer. It's interesting to get the opposite view.

Lots of surprises then for the committee when they get the opinions of those without a vested interest.

The politicians want to do reduce the 20% deposit as it is a vote winner, 'look at me, I fought for a reduction in the 20% deposit for FTB, vote for me'

The banks want MII because they can keep on lending while the mortgage holder stumps up the premium.

People should have a look at the mortgage arrears section of this site to see the misery that debt has brought to peoples lives. This is all brought about by the banks throwing money at people who couldn't afford it. That is what the Central Bank is trying to stop happening again.

I also understand what Karl Deeter is saying. It is incredibly difficult to get a mortgage these days. The banks go through every statement looking for unusual payments and you have to explain everything. But would you trust the banks to police themselves forever?


Steven
www.bluewaterfp.ie
 
So most of the people before the Committee were in favour of the proposal and yet the headline on the IT's article focuses on the person against it Karl Deeter:
Mortgage expert warns on ‘wrong medicine’ for housing market

And the Media feel they shouldn't be part of the Banking Enquiry as they didn't do anything to cause the property bubble!!!! Disgrace
 
Hi Delboy

I was surprised by the media coverage.

RTE gave priority to Karl Deeter as well, although the heading is better





The Examiner said



Mortgage insurance proposal criticised



which was probably the most balanced report. While it gave Karl a lot of coverage, it highlighted the contribution of Ronan Lyons and noted


His comments were broadly in line with the other speakers who also included Brendan Burgess of Askaboutmoney.com and Flac senior researcher, Paul Joyce.


... most speakers were in opposition to the latter but in favour of the Central Bank’s proposals.


The exception was Mr Deeter who opposed both measures, saying the 80% LTV proposals would lock people out of home ownership which would deny them a better financial future.

I had not known the views of the other presenters beforehand, so I too, was surprised that the four of us were broadly supportive of the Central Bank proposals.

We have heard a lot of opposition to the proposals. There was a guarded welcome from AIB - so I thought it was newsworthy that people with the interests of consumers were in favour of them.
 
It's very newsworthy Brendan and delighted you highlighted this here.

The media are so reliant on property that they have no shame in pushing/advertising/supporting it in any way they can.
And meanwhile, the IT continue to run reports from Kathy Sheridan on anyone she can find who's sleeping in a car or being evicted. She'll probably win an award this year as well for her campaign!

You couldn't make it up
 
Peter Matthews:
A house in Dublin which rents for €1,500 a month costs €400,000. If you value this on a rental yield basis, it is worth just €270,000 ( 270k@7% = €1,500 a month)

Therefore house prices are overvalued by 30% and will fall.

The problem is too much credit.

(He made a long speech so the above is only my summary. I presume he supports the minimum 20% deposit if he thinks house prices are overvalued by 30%)

So what if Dublin house prices are 'overvalued' by 30% based on the rental value calculation. Where in Europe is it the case that capital cities do not command a premium, just because they are a capital.
 
It will be difficult for FTBs to save up for a deposit of 20%, and so they should be allowed to save through their pension fund for the deposit. The tax-free lump sum on retirement would be adjusted for any amount taken early for the purchase of a home.


I think that's a crazy suggestion. Is there anywhere else in the world this has been tried. In any case, how would this work? How many people are even in pension schemes.

This would, it seems to me, only apply to people in very priviliged positions, high worth jobs etc. How many people are getting enough of a lump sum on retirement to be able to afford to reduce it due to the original deposit 30 years previously.
 
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