Independent economists' views of the Central Bank proposals

[Brendan Burgess]

Sindo Opinion 26th October

But because the rules will allow the banks to go above these limits for around one- fifth of home loans issued, they are not excessively rigid. Lenders will have some leeway (but not too much) in giving higher loans if they see the borrower has exceptional circumstances. That is as it should be, not least because no single set of rules can ensure that banks don't behave badly or stupidly.


Both of the proposed measures are thoroughly sensible and should have always been in place. They should help return retail banking to the safe-if-staid kind of business it used to be in the past, and still is in many other countries where such limits are in place.


If the Central Bank is be criticised, it is for not signalling clearly that it would tighten these measures further if it believes total lending is growing too fast in the future. It could also be criticised for not introducing the rules sooner, preferably in the depths of the crisis when memories were fresher and fewer first-time buyers' expectations would have been disappointed.


Rather than promising costly and socially damaging subsidies, the Government would be better off providing some real leadership by backing the Central Bank and explaining why borrowing too much before having saved enough is dangerous for individuals and dangerous for society.

 

[Brendan Burgess]

So does Jim Power as reported in today's Indo

http://www.independent.ie/business/...oversial-mortgage-deposit-plans-30790292.html

Mr Power said the proposals which would require most first-time buyers to need a hefty deposit were “prudent and sensible”.


“It is not the role of the Central Bank to worry about whether first–time buyers can get on the housing ladder or not. Its role is to control the risk in the mortgage market with the aim of bolstering the stability and resilience of the banking system,” Mr Power said.

 

[Brendan Burgess]

Gregory Connor provided a link to this article in the New York Times which is well worth a read.

Underwriting the Next Housing Crisis

[FONT=&quot]The regulators (Not sure which regulat[FONT=&quot]ors he refers to here? -BB[/FONT][FONT=&quot][FONT=&quot]) [/FONT][/FONT]believe that lower underwriting standards promote homeownership and make mortgages and homes more affordable. The facts, however, show that the opposite is true.[/FONT]

[FONT=&quot]In the late ’80s and early ’90s, down payments were 10 to 20 percent. The homeownership rate was 64 percent — about where it is now — and nearly 90 percent of housing markets were considered affordable (that is, home prices were no more than three times family income). By 2011 only 50 percent were considered affordable, and by 2014, just 36 percent — even though down payments as low as 5 percent are now common.[/FONT]

[FONT=&quot]How could this be? Consider this: If the required down payment for a mortgage is 10 percent, a potential home buyer with $10,000 can purchase a $100,000 home. But if the down payment is dropped to 5 percent, the same buyer can purchase a $200,000 home. The buyer is taking more risk by borrowing more, but can afford to bid more.[/FONT]

[FONT=&quot]In other words, low underwriting standards — especially low down payments — drive housing prices up, making them less affordable for low- and moderate-income buyers, while also inducing would-be homeowners to take more risk.[/FONT]

[FONT=&quot]That’s why homes were more affordable before the 1990s than they are today. Back then, when traditional standards for “prime” mortgages prevailed, homes were smaller; they had fewer bathrooms, and the kitchens were not appointed by Martha Stewart. A family could buy and live in a “starter home” for several years before selling it and using the accumulated equity to buy a bigger or better appointed home.[/FONT]

[FONT=&quot]In a competitive housing market not subsidized by lax standards, home builders would similarly adjust by reducing the size and amenities of new homes to meet the financial resources of home buyers entering the market. Home prices would stabilize and not rise faster than incomes. Low- and moderate-income families and millennials might have to wait to save for a first home, but they would be able to afford it.[/FONT]

 

[44brendan]

It is not the role of the Central Bank to worry about whether first–time buyers can get on the housing ladder or not. Its role is to control the risk in the mortgage market with the aim of bolstering the stability and resilience of the banking system,” Mr Power said.

An interesting an accurate observation. The difficulty with the CB acting on a single mandate basis is that it will totally exclude the State from influence in any of CB's decisions.
Some will say that this is totally a positive move in that Government influence in the past in CB regulations has fed the impact of the Economic Crisis. However, the Irish Economy and much of Government policy is dependant on the availability of loan funds from banks. While prudent lending is always necessary, an overprudent approach may both slow down the Economy and may result in the unintended consequence of precipitating a further Economic slide.
I am not saying that the proposed LTV restrictions are over prudent. However, what is to stop the CB from increasing these guidelines to 30 or 40% and in the future applying similar rules for commercial loans?
I would raise the issue of the potential dangers that a totally independent CB can cause if their rules are not somewhat in line with State current policy and Economic movement within the country. The answer to imprudent lending is to apply the standard rules and ensure that those who transgress from them are censured rather than create new rules which may cause more damage than good.