"Central Bank mortgage rules are absolutely correct"

[odyssey06]

I think that the limit should be 3.5 times.
But for lower incomes, it should be much lower.
If someone were on a salary of €100k, it is ok to lend them €500k?

Brendan

We seem to be both saying that not looking at income level means that the current lti of 3.5 is a crude tool?

I don't know what the right levels are. I think taking income levels into account could well see a different sensible range from say 3 to 4 based on income level.

There may well be a better approach than lti. Am open to ideas. But I am certain that any lti scheme than doesn't take income level into account is crude and potentially flawed.

 

[Gordon Gekko]

What's happening now?

Wealthy parents buying houses for their children and wealthy investors are buying properties to take advantage of spiralling rents.

And with regard to the exemptions, banks are cherry picking customers. Given the choice between and accountant and a Garda, they choose the former.

These rules are creating fundamental issues in our society and are compounding inequality.

 

[Sarenco]

The people drawing up the guidelines on the high spec for emissions and energy profile of new homes are also not concerning themselves with social issues. Would it be prudential of them to do so? They would argue they have a remit to achieve certain energy targets not to increase housing supply. Something about a situation where we have such narrow remits and cross purposes doesn't add up to me...

In a financial context, the objective of "prudential regulation" is to protect the stability of the financial system and to ensure that banks are in a position to meet their obligations to depositors.

The Central Bank does not, and should not, have any broader mandate to promote social equality or mobility.

But my main criticism of the Central Bank restrictions is noted earlier. I think they are more restrictive than they need to be.
Does 3.5 income ratio make sense for all income levels? I'd like to see the evidence why.

I just think coming out and stating that the actual rules are absolutely correct is a very strong claim

Well, I posted the Central Bank's evidence showing the correlation between high LTVs and LTIs and losses on loan defaults.

To be fair, I didn't actually say that the rules were absolutely correct - I said that they looked about right to me based on the available evidence.

The Central Bank stated that they would have preferred to set an overall debt to income (DTI) limit rather than a LTI limit but this was not practical given the lack of an appropriate public register.

 

[Delboy]

What's happening now?

Wealthy parents buying houses for their children and wealthy investors are buying properties to take advantage of spiralling rents.

And with regard to the exemptions, banks are cherry picking customers. Given the choice between and accountant and a Garda, they choose the former.

These rules are creating fundamental issues in our society and are compounding inequality.

So the solution is to 'lock and load' those without the rich parents so they can compete at the same level. Debt spiral

 

[Sarenco]

These rules are creating fundamental issues in our society and are compounding inequality.

Even if that was true, which I very much doubt, what exactly does is it have to do with the prudential regulation of our banks?

I would have thought that the sub-prime debacle in the US would have put an end to the idea that elevated debt levels are an appropriate way of promoting social equality/mobility.

 

[Brendan Burgess]

These rules are creating fundamental issues in our society and are compounding inequality.

You keep missing the point. The rules are not doing this. It's the very high cost of housing in Dublin related to average salaries.

Relaxing the rules would make things worse as house prices would rise so people would be stuck with bigger mortgages for the same houses.

Relaxing the rules for only one person would be fine. They could get a mortgage and house prices would not be inflated. But relaxing them for everyone makes matters worse for all buyers.

Brendan

 

[Gordon Gekko]

But Brendan, prices are not falling because of the rules. They are increasing modestly. And the exemptions are being used to cherrypick the wealthy of the future (trainee professionals). Banks should be protected through higher capital requirements, not through social engineering.

I am not advocating wild Celtic Tiger style lending. Simply a return to 90% maximum LTVs for everyone because 20% is a ridiculous number to have to come up with.

 

[Brendan Burgess]

But Brendan, prices are not falling because of the rules. They are increasing modestly.

I am not sure what you mean here. Are you implying that the rules are causing prices to rise? I presume not, but I am confused. By limiting excessive credit, it's likely that the effect of the rules is to reduce prices, all other things being equal.

And the exemptions are being used to cherrypick the wealthy of the future (trainee professionals). Banks should be protected through higher capital requirements, not through social engineering.

It's a fact of life that the wealthier can buy houses earlier. That is not because of the bank's rules.

Simply a return to 90% maximum LTVs for everyone because 20% is a ridiculous number to have to come up with.

OK, so you agree that the 90% is appropriate for first time buyers? Personally, I think it's too high. It's too risky for both sides.

The main problem is that people can't get on the ladder so it's probably ok to take extra risk and let them borrow 90%.

But there is almost no case for allowing second time buyers to borrow more than 80%.

The exemptions do allow the lenders exceed this where the specific circumstances allow.

Brendan

 

[odyssey06]

I have already posted the Central Bank's loan level data that shows that losses increase significantly on defaults for loans with an LTV over 85% at origination. Internationally, LTVs over 80% would be considered very high risk from a lender's perspective. LTVs over 80% carry a higher risk weighting under Basle II and lenders have to set aside additional capital for such loans. In the US, borrowers are required to take out (very expensive) additional insurance (PMI) to provide additional protection to a lender once an LTV exceeds 80%. It seems to me that the general 80% LTV limit is entirely appropriate.

I would have preferred a US insurance style approach rather than a restriction. It would allow for a situation where it makes financial sense for the bank to offer the 80% loans even accounting for the insurance costs.

 

[Gordon Gekko]

I am not sure what you mean here. Are you implying that the rules are causing prices to rise? I presume not, but I am confused. By limiting excessive credit, it's likely that the effect of the rules is to reduce prices, all other things being equal

Prices are still increasing, albeit modestly, salaries are not really increasing, and the big costs in people's lives such as childcare and rent are increasing. If house prices were falling and making it easier for people to buy, I would agree with you, but for many these rules mean that home ownership is a bus that they are chasing. It is getting further away rather than nearer.

 

[Sarenco]

Imagine what the situation would be if the Central Bank hadn't introduced these rules? Another unsustainable, debt fuelled, property bubble - all the signs were there in 2014.

If salaries are increasing modestly then, all else being equal, you would expect property prices to rise modestly.

 

[Sarenco]

I would have preferred a US insurance style approach rather than a restriction. It would allow for a situation where it makes financial sense for the bank to offer the 80% loans even accounting for the insurance costs.

But the bank doesn't pay for the PMI - that's a borrower cost.

The insurance solution really only moves the increased default risk to another part of the financial system - from a bank to an insurer.

 

[newtothis]

OK, so you agree that the 90% is appropriate for first time buyers? Personally, I think it's too high. It's too risky for both sides.

The main problem is that people can't get on the ladder so it's probably ok to take extra risk and let them borrow 90%.

That sounds like the basis for a reasonable way of addressing the problem: for first-time buyers, allow a LTV of 90%, for everyone else 80%. I'd agree it's crazy to allow the level of borrowing to high multiple of earnings for anyone. On that point though, I can't understand why it's done as a multiple of gross earnings: it would make more sense if it were based on net income.

 

[Brendan Burgess]

On that point though, I can't understand why it's done as a multiple of gross earnings: it would make more sense if it were based on net income.

In my submission, I suggest that other borrowings should be taken into account. For example, if someone has a €20k car loan, it should be deducted from the amount allowed to be borrowed, but the CB rejected this.

 

[Sarenco]

In my submission, I suggest that other borrowings should be taken into account. For example, if someone has a €20k car loan, it should be deducted from the amount allowed to be borrowed, but the CB rejected this.

Hi Brendan

I think that the Central Bank will probably move to a debt to income ratio (as opposed to the LTI ratio) in time. On introducing the rules, the Central Bank stated:

"Given that the Central Credit Register is not yet in place it would be premature to establish realistically-enforceable regulations based on total debt. However, we believe the measures cannot be delayed until such a register is established."

I'm inclined to agree with you regarding the 90% LTV limit for FTBs but the Central Bank gave this justification for the lower limit:

"This approach has been taken to address the concerns raised in the submissions regarding fairness, access to mortgage finance and homeownership and have been informed by empirical research, for example, the finding that FTBs have a lower risk of default than second and subsequent buyers. Limiting higher LTVs in this manner should help prevent a credit-fuelled property bubble from developing as it did in the recent past while at the same time not overly restricting access to credit to FTBs."

I read the so-called empirical research that concluded that FTBs have a lower default risk than other borrowers and I didn't find it particularly convincing. However, the 90% LTV limit for FTBs up to a reasonable amount seems like a reasonable compromise position.

 

[odyssey06]

I remember reading something about a push (EU-wide?) for changing the basis on which the "Value" of the house was calculated? i.e. something more complicated than just current market value?

Would that impact the concept of "Value" as used in these restrictions and what would that impact be?

 

[Brendan Burgess]

I read the so-called empirical research that concluded that FTBs have a lower default risk than other borrowers and I didn't find it particularly convincing.

I didn't read it but I found it surprising. I wonder if the individual banks agree with it.

Brendan

 

[demoivre]

In my submission, I suggest that other borrowings should be taken into account. For example, if someone has a €20k car loan, it should be deducted from the amount allowed to be borrowed, but the CB rejected this.

One size does not fit all people! A couple with no car loan but who smoke 20 a day each would be spending about €560 per month on their habit, and their mortgage protection policy would be loaded. The car loan over 5 years would cost about €400 per month.