Could the Central Bank have limited LTV's years ago?

P

Purple

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The property bubble was a result of cheap credit and massive LTV mortgages. We all knew it was happening. What could have been done to stop it? While tax reliefs added to the bubble they were not the major factor; cheap credit was, so given that we could not control access to cheap credit what else could have been done? Would limiting the LTV that banks could issue mortgages for have done the trick?

Does the Central Bank have the power to limit or cap the loan to value ratio of mortgages that Irish banks (and other banks operating in Ireland)?
If it does then why didn’t it do so 5 or 10 years ago?
If it does not would giving it such powers be allowed under EU law?
 
Could, or should? They made no effort to prevent people borrowing large multiples of earnings, despite their 'guidelines'.

How independent is the Central Bank anyway? Maybe government policy prevented them intervening? I doubt it though, given they always portrayed a pretty rosy picture, so I doubt they had the will to do so, regardless of any political intervention.
 
rmelly said:
Could, or should? They made no effort to prevent people borrowing large multiples of earnings, despite their 'guidelines'.

How independent is the Central Bank anyway? Maybe government policy prevented them intervening? I doubt it though, given they always portrayed a pretty rosy picture, so I doubt they had the will to do so, regardless of any political intervention.
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My question is do they have any teeth? Could they have forced the banks to do what they wanted them to do?
 
Purple said:
Does the Central Bank have the power to limit or cap the loan to value ratio of mortgages that Irish banks (and other banks operating in Ireland)?
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Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?
 
Complainer said:
Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?
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Couldn't agree more. Banks should be allowed to fail.

Although I do feel obliged to state that the existence of the ECB and their ability to dictate interest rates (price fixing of money) is somewhat far removed from a laissez-faire system.
 
room305 said:
Couldn't agree more. Banks should be allowed to fail.
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Taking this to the next level, do you also think there shouldn't be any form of deposit protection, whether 20k, 100k or unlimited?
 
You've forgotton the 30 or more year mortgages and the mortgage of 100% or more to add to the easy credit, and low LTV. The central bank is made up of the other banks, it's a nice cosy club, and they weren't going to do so anything to stop the bubble as they were too greedy chasing profit and they obviously agreed to this as the best course of action amongst themselves when they held their highly secretive meetings. As a certain stage people were saying interest rates will never go above 4 %, well in my lifetime I remember interest rates of 17% but you had to have a deposit and beg your bank manager for a mortgage. You had to make some kind of effort, up to last year you just could pick your dream house, landscape it, furnish it , buy the new car all at the same time but you have more than 100% mortgage, no equity, no leeway as your mortgage is 40+ years and if interest rates go up by so much as a 1/4 of a percent it sends you over the abyss. In the meantime before interest rates rose and if you got into trouble you just went for a consolidation loan again and again and again.... Banks wrote blank cheques for people and what a surprise when these people learnt nothing and went back again for more credit. Of course when this mess all boils down there will be regulations so it doesn't happen again. Well not until 2034.

Edit: I should have said the Financial Regulator above not the central bank. I'm getting confused between the two. But it still amounts to the same thing.
 
Go back and read some of the older threads from Askaboutmoney. Was this suggested? What was the response?

The Financial Regulator, not the Central Bank, regulates the Irish banks.

They did take action on the lending practices. For example, when the EBS ignored the stress testing, the FR pulled them in over it.

The FR was in a difficult position. They were concerned. They did implement stress testing. They did call for caution. Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses. They would not have appreciated that the FR was doing them a favour.

Brendan
 
Brendan said:
Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses. They would not have appreciated that the FR was doing them a favour.
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Indeed but I would have thought that the whole reason for having a Financial Regulator and a Central Bank in the first instance was to ensure that politics would not affect the whole process of governance? Imagine if the Bank of England could not interest rates upwards because of political pressure?
 
ubiquitous said:
Indeed but I would have thought that the whole reason for having a Financial Regulator and a Central Bank in the first instance was to ensure that politics would not affect the whole process of governance? Imagine if the Bank of England could not interest rates upwards because of political pressure?
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Exactly.
 
Complainer said:
Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?
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If you tell me your opinion then I'll answer your question but I will not be replying to any more posts from you where your only contribution is to have a go at me without offering anything constructive to the thread.
 
room305 said:
Couldn't agree more. Banks should be allowed to fail.

Although I do feel obliged to state that the existence of the ECB and their ability to dictate interest rates (price fixing of money) is somewhat far removed from a laissez-faire system.
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But the free market is an artificial construct and regulation is required to keep it in existence.
Banks are of vital importance to the economy, they require a license to operate and it is in the public interest that they operate in a sound fashion. Even without the credit crunch Irish banks were going to be in trouble because of their exposure to the construction industry. The financial regulator, the Central Bank and the government all knew what was happening and they did nothing. I would like to know why.
Could they have limited LTV’s?
Could they have limited the income multiples that people could borrow (change the stress testing criteria)?
Did the regulator or the ECB have the power to do the above? If so then why did they sit on their hands? If not then why did the government not empower them to do so?


Basically where does the book stop?
 
Brendan said:
Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses. They would not have appreciated that the FR was doing them a favour.

Brendan
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the prices being charged for houses would not have been so high if the FR had done it's job and limited all mortgages to 80%LTV!! do you really think that the prices being charged for houses during the boom (RIP) were reflecting costs plus a reasonable profit margin? i don't think so, if the mortgages had been limited the prices being charged would have reflected that. the whole thing was a circle jerk between the banks and the developers.
 
Brendan said:
They did take action on the lending practices. For example, when the EBS ignored the stress testing, the FR pulled them in over it.
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This does not sound like very strong action against EBS for ignoring their guidelines though does it? I also share Purple's concern on whether the FR actually has enough power to do it's job effectively or is it simply the case that it was negligent in it's role these last years. If it doesn't have enough power to fulfill it's role than that would need to be addressed fairly urgently. If it was simply negligent then heads should be rolling in the FR. Simple as that really.

Brendan said:
The FR was in a difficult position. They were concerned. They did implement stress testing. They did call for caution. Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses. They would not have appreciated that the FR was doing them a favour.
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The FR is not a democratically elected body though. It does not have to pander to the masses; it simply has to ensure that the Irish financial system is sound. This they were not able to do so the reasons they failed need to be uncovered to prevent us reaching this point again.
 
Why haven't we heard from the regulator or the head of the central bank in the past few days reassuring people that they know exactly what is on the bank's books and they feel very comfortable with what the Government is doing. I reckon it is because they haven't got a clue what is on bank's balance sheets. Also, what exactly is the role of the head of the Irish Central Bank at the moment? What does he do to justify being one of the highest paid central bankers in Europe. I work in financial sevices and I don't even know his name.

I used to be involved in regulatory reporting for a bank and while there are some very competent people working in the regulator, all they cared about was getting reports on time and making sure no big flashing neon warning signs appeared. I never once saw them take a hands on approach in 3 years of working in the area. They just believed everything banking executives told them. Just like in the recent prime time story about mis-selling. What did the regualtor do? Got a letter from each CEO telling her that they don't mis-sell. Good stuff!
 
Restricting LTV would have slowed down the buying process as buyers would have had to come up with deposits (i.e savings) but there were ways around this.
The multiples of salary that the banks were lending to certain applicants was root cause of the current crisis. In theory I still see nothing wrong with 100% mortgages for professionals who have a fairly definite career path with a gradual rise in salary.
The problem was giving 100% mortgages to "normal" applicants with no career path or salary scale.
No matter how many 100% mortgage I have done for professionals (doctors, barristers, accountants) not one of them has defaulted or to my knowledge has been close to defaulting.
High LTV wasn't the problem, it was the class of applicant getting the 100% mortgage.
 
NorfBank said:
Restricting LTV would have slowed down the buying process as buyers would have had to come up with deposits (i.e savings) but there were ways around this.
The multiples of salary that the banks were lending to certain applicants was root cause of the current crisis. In theory I still see nothing wrong with 100% mortgages for professionals who have a fairly definite career path with a gradual rise in salary.
The problem was giving 100% mortgages to "normal" applicants with no career path or salary scale.
No matter how many 100% mortgage I have done for professionals (doctors, barristers, accountants) not one of them has defaulted or to my knowledge has been close to defaulting.
High LTV wasn't the problem, it was the class of applicant getting the 100% mortgage.
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Of course 'professionals' operate in an economic world untouched by the vagaries of "normal" recessions, where career paths stretch into the distance like the yellow brick road.

Regarding the role of the Central Bank this article from 2004 makes for interesting reading.



Central Bank must address house bubble trouble
By Brian O’Mahony
TWO economists have concluded that liberal lending by Irish banks has contributed 13% to the rise in house prices in recent years.This is the first time the questionable role of the banks in Irish house price inflation has been quantified.

Of particular interest is the genesis of this report however.
It is the work of two Central Bank economists, but in an ingenious touch of distancing the bank from the findings, the authors said it did not necessarily reflect the bank’s view.

This smacks of duplicity. For ages now the Central Bank has been warning that we are in danger of puncturing the thin filament of what will be a very serious house price bubble.

They have formally issued that warning. What they have refused or failed to do is point the finger at the lenders - the banks who so far have shown a reckless disregard for the market and the damage ordinary investors will suffer if the market does go awry.
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[broken link removed]
 
SPC100 said:
I don't know the legalities, but to the me the income multiple would be a better and more appropriate metric than simply LTV.

People can still get deposits from parents, credit unions, Friends, car loans etc.,

Even if the limit was set at 6 or 7 times one salary, people could not spend on houses what the bank would not give.

If this was the case it is hard to see how the average house would get to 10x the average salary.

But this regulation needs to be in place from the start or implemented very slowly or else recent purchasers would suffer with negative equity as soon as the regulation was brought in.
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Good post; I agree.
 
SPC100 said:
Even if the limit was set at 6 or 7 times one salary, people could not spend on houses what the bank would not give.

If this was the case it is hard to see how the average house would get to 10x the average salary.
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Hypothetically if all applicants earn 30k and there are only one person mortgages then I agree house prices may hover around 210k (7 times earning) if mortgages granted on a straight multiple.
However if there are 2 parties to the mortgage on 30k each then they are given €420k to play with, house prices shoot up to 10x the average salary.

Maybe the old days of a multiple of the first plus half of the second salary was the correct way after all.


One other thing, it wasn't just simple LTV, you had (have) to show repayment capacity on the amount you were being offered whether the LTV was 30% or 100%.
 
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