I've broken this out into a separate thread so as not to distract from @pacmon moneymakeover so below are are some posts for context. I fully understand the reason for these limits but I don't believe a blanket 3.5x income is the right way to do it. It should be on a sliding scale that factors in age, dependents and pension provision
Central Bank LTI rules should change
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It is a valid choice from the OP's perspective but the bank should protect themselves against it. Single income, 5 dependents and currently no pension should be a major red flag for any bank during underwriting.
I'm not suggesting the OP would do this (I'm generalizing) but if a decision needs to be made to make mortgage payments or pay for 3rd level education, the bank will be the loser. OP would have no need for more lending so arrears do not negatively impact their credit report as they will no longer need it. LTV is also meaningless as there is very little power to force a sale especially with kids involved.
Being able to repay and being able to afford are two very different things. If nothing changes income wise, they will really struggle to fund 3rd level and pensions. The bank will be happy but the OP will be in a difficult financial position at retirement
And in this instance the rules have failed to protect the bank from itself. The risk profile of OP should be very high and the bank should take this into account and limit the lending to much less than 3.5
There was recently another moneymakeover of a dual income, no kids, early 30's and public servants where you suggested their LTI was high at ~2.6. I fail to see the logic in this
DINKs with too much cash
From a banks perspective, who is more likely to default at 3.5x LTI?
- Single income, 5 dependents and currently no pension or
- dual income, no kids, early 30's and public servants
NoRegretsCoyote
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I disagree a bit. Simple rules are better than complex ones, CBI is just targeting the wrong variable.
Limit should be simply debt servicing costs to net income (assuming loan paid by retirement). This is how most EU countries with macro-prudential rules do it.
In this case OP is at close to 40% of net income on debt servicing costs. Something in the low 30s would be my idea of prudent
I agree but some of those factors are inherently captured by by your method.
Being younger allows for a longer term and reduces the monthly commitment
Dependents will impact your net income which can be assessed during underwriting
The only thing not captured is pension provision. No pension at 30 shouldn't be particularly concerning to a bank but no pension at 45/50 should be. Some simple rules to capture this could easily be applied
NoRegretsCoyote
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With apologies for the long post but most people get a few things wrong when it comes to macro-prudential rules. I have more than a passing familiarity with their rationale and background.
The first is that they are macro-prudential rules, not micro-prudential rules. They are designed to have an effect at the level of the market, not at the level of the lender or borrower. They are there for basically one reason: so that overall house prices don't rise too much (and subsequently fall) with big effects for the real economy. It is done at market level so that banks cannot try to steal market share by being more lax than the competition.
Banks are also subject to micro-prudential supervision, and there is nothing to stop the supervisor for telling a bank that its mortgage lending is too risky even if they are compliant with macro-prudential rules! For example if a lender is over-lending to a particular type of borrower, or is overly reliant on mortgage lending per se. This is highly unlikely with the macro-prudential rules as currently in existence, but it's very important to recall that that it's a theoretical possibility. Macro- and micro-prudential rules have different rationales. Micro-prudential supervision is to ensure that excessive risk is not taken by particular practices that can threaten the overall financial system. It will have a different focus from bank to bank as banks have different business models. You can have macro-prudential rules for mortgage lending as it is pretty vanilla.
The related, very important thing is that macro-prudential rules should not substitute for sound governance surrounding credit risk management at bank level. A bank should not simply say "LTI<3.5, LTV<90%, all is good" and lend on this basis. I have my issues with how the macro-prudential rules are designed (more to come) and in my view they are much more conservative than they need to be. But there are cases as we've seen in the other thread where a loan is relatively risky despite being well within the 3.5 and 90% limits. I have no first-hand knowledge, but my guess is that macro-prudential rules are substituting for sound, loan-level risk assessments at Irish lenders. This is again a function of the conservatism of the rules . In most cases LTI<3.5 and LTV<90% is very prudent at loan level, but here we've seen that both bank and borrower than that something is prudent at individual level on the basis of a set of rules that are designed to limit house prices at the level of the market.
@_OkGo_ I agree that an overall assessment of asset position is something that banks should carry out when making loan-level assessments. For example if someone is 45 and can access a large pension at 50 then a heavy mortgage to bridge the gap shouldn't be an issue. But this should be a commercial decision for a lender based on its own risk appetite. Such a decision by a lender should be taken within the framework of macro-prudential rules of course, but I just don't think that macro-prudential rules should by their nature become even more prescriptive and detailed. If they do there is simply more of a chance that the lenders start using them as a rule of thumb rather than doing their own loan-by-loan risk assessments. So I don't think macro-prudential rules should include things like number of children, pension provision, etc, as once you start introducing these factors it means you have to introduce even more of them.
As I've argued on several threads before I think macro-prudential measures are a good thing. I think they should be simple to understand and operationalise and this is currently the case. The biggest problem with the current rules is that they are invariant to the interest rate cycle. An LTI of 3.5 meant something very different in 2015 when rates were well north of 3% from early 2022 where they were briefly below 2% for one lender. I think that the rules should adapt as interest rates do. The best way to do this is debt service (and this includes all debt) as a share of household disposable income - something like <35% on the basis of today's interest rates, and <40% stressed for another 100bps.
I've lost track of where the CBI are with reviewing these rules but I hope they move to this kind of approach. It is what nearly every other EU country with macro-prudential rules does. The reasons they went for LTI in 2015 were a) it's easy just to copy the UK; b) the central credit register wasn't in place so hard to a get a holistic view of overally debt of a borrower. Now that the CCR is operational I really think they should move to a debt-service-to-disposable-income basis.
The first is that they are macro-prudential rules, not micro-prudential rules. They are designed to have an effect at the level of the market, not at the level of the lender or borrower. They are there for basically one reason: so that overall house prices don't rise too much (and subsequently fall) with big effects for the real economy. It is done at market level so that banks cannot try to steal market share by being more lax than the competition.
Banks are also subject to micro-prudential supervision, and there is nothing to stop the supervisor for telling a bank that its mortgage lending is too risky even if they are compliant with macro-prudential rules! For example if a lender is over-lending to a particular type of borrower, or is overly reliant on mortgage lending per se. This is highly unlikely with the macro-prudential rules as currently in existence, but it's very important to recall that that it's a theoretical possibility. Macro- and micro-prudential rules have different rationales. Micro-prudential supervision is to ensure that excessive risk is not taken by particular practices that can threaten the overall financial system. It will have a different focus from bank to bank as banks have different business models. You can have macro-prudential rules for mortgage lending as it is pretty vanilla.
The related, very important thing is that macro-prudential rules should not substitute for sound governance surrounding credit risk management at bank level. A bank should not simply say "LTI<3.5, LTV<90%, all is good" and lend on this basis. I have my issues with how the macro-prudential rules are designed (more to come) and in my view they are much more conservative than they need to be. But there are cases as we've seen in the other thread where a loan is relatively risky despite being well within the 3.5 and 90% limits. I have no first-hand knowledge, but my guess is that macro-prudential rules are substituting for sound, loan-level risk assessments at Irish lenders. This is again a function of the conservatism of the rules . In most cases LTI<3.5 and LTV<90% is very prudent at loan level, but here we've seen that both bank and borrower than that something is prudent at individual level on the basis of a set of rules that are designed to limit house prices at the level of the market.
@_OkGo_ I agree that an overall assessment of asset position is something that banks should carry out when making loan-level assessments. For example if someone is 45 and can access a large pension at 50 then a heavy mortgage to bridge the gap shouldn't be an issue. But this should be a commercial decision for a lender based on its own risk appetite. Such a decision by a lender should be taken within the framework of macro-prudential rules of course, but I just don't think that macro-prudential rules should by their nature become even more prescriptive and detailed. If they do there is simply more of a chance that the lenders start using them as a rule of thumb rather than doing their own loan-by-loan risk assessments. So I don't think macro-prudential rules should include things like number of children, pension provision, etc, as once you start introducing these factors it means you have to introduce even more of them.
As I've argued on several threads before I think macro-prudential measures are a good thing. I think they should be simple to understand and operationalise and this is currently the case. The biggest problem with the current rules is that they are invariant to the interest rate cycle. An LTI of 3.5 meant something very different in 2015 when rates were well north of 3% from early 2022 where they were briefly below 2% for one lender. I think that the rules should adapt as interest rates do. The best way to do this is debt service (and this includes all debt) as a share of household disposable income - something like <35% on the basis of today's interest rates, and <40% stressed for another 100bps.
I've lost track of where the CBI are with reviewing these rules but I hope they move to this kind of approach. It is what nearly every other EU country with macro-prudential rules does. The reasons they went for LTI in 2015 were a) it's easy just to copy the UK; b) the central credit register wasn't in place so hard to a get a holistic view of overally debt of a borrower. Now that the CCR is operational I really think they should move to a debt-service-to-disposable-income basis.
https://www.centralbank.ie/docs/def...rtgage-measures-framework-review.pdf?sfvrsn=5
Sorry. It was a consultation paper but goes through the various alternatives and leans towards their approach at the end.
Sorry. It was a consultation paper but goes through the various alternatives and leans towards their approach at the end.
Remember having this discussion somewhere here before.......your point on interest rates makes sense but ONLY if someone was entering into a 25 or 30yr fixed rate mortgage product......in this case I would be comfortable with debt service ratios being used versus straight LTI's but only in that instance.
In all other cases & mortgage products the CBI has the correct approach here..........Ireland as an economy has operational leverage......that is to say when the global but mainly European/US economies are doing well we do VERY well but the reverse is true......when Europe/US catches a cold, Ireland gets pneumonia.......you DO NOT put financial leverage inside/on top of an economy or a business with operational leverage. It ends terribly 80% of the time, all the time
Finally do not forget we in Ireland do not control our own interest rates.....we are FIVE million people in a monetary block of FIVE HUNDRED million people.....it is inevitable that we will have interest rates in this country that are wholly inappropriate for our economy at various points in the cycle in the decades ahead. In 2000's rates were too low.....but it isn't inconceivable that at some point in the future we will have rates that are too high, this would occur if something unique to the Irish economy (say levels of FDI) collapsed but our European neighbors economies were motoring along fine such that ECB in that scenario had rates trending upwards, while our economy was on the march down. Imagine what your proposing would look like in that scenario....if over time our economy began to look in terms of its mix more like the German economy we would be on safer ground for what your proposing but our economy/economic model is unlike any in the EU and we need to remember that.
This is the nub of what I am getting at. The macro rules used at micro levels can significantly increase risk to the individual. The lending institution can easily handle that risk if it is one loan among many where it all averages out to the macro rules.
But the lending institution has recklessly loaned to an individual that will likely face serious financial burdens if anything changes to their employment status
So then my next question is where is the micro-prudential supervision coming from? Is it the CBI? How are these corner cases investigated?
Yes and No - the ultimate internal underwriting model used by any bank, not just Irish ones is debt service capacity where a bank chooses a maximum percentage of after tax income that can be consumed servicing the loan to be extended. For housing its broadly say ~25% of after tax household cashflows. Auto loans maybe 10 -15%. This test is applied to EVERY loan using the current mortgage rates and then stress tested against adverse rates for example 2%+ rise in rates..
It just so happens that for the last decade that because of low interest rates Irish households borrowers in the main had lots of debt service capacity to spare as the monthly payments on a mortgage were relatively low......such that they could have technically supported a larger nominal mortgage amount......and so this "micro-prudential" threshold was never really triggered but rather the CBI LTI rules kicked in first & earlier to limit the amount that could be extended. In 3.5x exemption cases I'm sure they used this rule to figure out how far they would go with the exemption limits....this is where bank underwriters would really do some traditional underwriting and sharpen the pencil.
So taking your comment I would say the following - sound, loan-level risk assessments are ALWAYS being done.....it just so happens because of low rates that Irish bank underwriters have had CBI 3.5x limits triggered first. This may change as rates rise and perhaps we may have a time where debt service capacity thresholds get triggered before any macro prudential rules come in.....but we've got a long way to go from 3% average mortgage rates to get to that point....and hence why I dont see rising rates having that big of an effect on Irish house prices moving forward as debt service capacity still has overhead.
What happened in ~2007 is everything inside a bank underwriting model had been turned up to 11 (& beyond).....Irish house prices were being levitated by extremely lax lending standards.....LTI's AND debt service capacity models which had everything thrown at the them (remember your Bulgarian apartment rent roll could be used back then to figure out your debt service capacity, crazy stuff)
Right now, if anything, Irish house prices are being capped/contained (relative to the supply/demand imbalance) by the macro prudential lending standards.....debt service capacity on 3% mortgages would allow for actually much largers mortgages than the 3.5x ones being issued.
Putting aside the idea of moral hazard.........micro-prudential supervision is that old quaint idea that you dont do dumb things that might result in loans going bad over time.....because losing money on loans hurts your long term profits and destroys shareholder equity.
I know, i know. I'm old fashioned - and I assume that you have a real banker running a bank. Which reminds me of the old adage that the problem we've always had in Ireland and elsewhere is that there are too many banks and not enough bankers to run them and so over time you get bank blowups.....Anglo et al........Bank are, IMO the simplest business in the world, but the hardest to run because of the monkey in the machine. You can run a hugely successful, on paper, bank in the short run.....just issue loans, grow your assets.......the scariest thing in the world is fast growing financial company....were about to see the movie played over again right now in the world of FinTech (Crypto, BuyNowPayLater, Insurtech's,Stock Trading). Everything old, is new again as they fella says.
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