Brendan Burgess
Founder
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Submission from Brendan Burgess- draft for comments by the Askaboutmoney community
I fully support the principles of prudent lending. The Central Bank should resist pressure to allow reckless lending and reckless borrowing. It is not in anyone’s interest.
After the last consultation, the Central Bank buckled and allowed First Time Borrowers to borrow up to 90%. Borrowing at this level is reckless borrowing. Lending at this level where the Courts System does not allow repossessions, is reckless lending.
The Central Bank should resist such pressure and tighten the lending limits to what they originally intended.
The Central Bank cannot solve the housing problem by allowing reckless lending. It should not try to do so.
The main result of throwing more money at borrowers will be to push up the price of housing. It will have a limited impact on the supply of housing. The Central Bank does not have the power or the responsibility of solving the housing crisis.
Blaming the Central Bank is only diverting attention from the real cause of the problem – the very high cost of building new houses in Ireland. The government should focus on bringing down the cost:
· Removing VAT, taxes and other levies from newly built houses
· Reducing the specifications for starter houses
The Central Bank should not allow lending in excess of 80% LTV until the government allows banks repossess homes from people who won’t pay,
The Central Bank should make it very clear that the repossessions systems in Ireland is broken. This suits only those people who do not want to pay their mortgage as they can get away with it. It’s wrong for lenders to give 90% mortgages to borrowers who face no sanction if they choose not to pay their mortgage.
The Central Bank should make it clear to the government and to the public, that it will not allow lending in excess of 80% LTV until the banks are able to quickly repossess houses where the borrowers don’t pay.
The government should facilitate First Time Buyers to accumulate the deposit to buy a house through integrating the pensions and housing policy.
In simple terms, First Time Borrowers should be allowed “borrow” the deposit from their pension fund. The overall tax relief on pensions would not be increased. But instead of the pension fund investing in shares or investing in deposit accounts, they would invest in the person’s family home.
If this were introduced, the Central Bank could apply the 80% limit to all buyers.
The Central Bank’s justification for allowing FTBs to borrow up to 90% is not supported by its own research
In an effort to appease the criticisms of the initial proposals the Central Bank claimed that their research justified an exemption up to 90% for First Time Buyers
The research does not support this. True, the research shows that default rates are lower for First Time Buyers than Second Time Buyers. But the default rate is not the correct measure of risk. The only way to justify such an increase is to show that the banks suffer lower losses on 90% mortgages to first time buyers. And there is no evidence that this is the case.
Other research by the Central Bank shows, as expected, that losses are higher on higher Loan to Value Mortgages. So while a 90% loan to a First Time Buyer might default less, the loss, given default would be higher.
The Central Bank needs to show evidence that the 90% limit is justified by loss rates, and not just by default rates.
If the FTB’s increased loan is justified, then it should be extended to other categories of borrowers
The Central Bank’s default rate research showed the following:
· A self-employed person is 8.5 percentage points more likely to default than an employee
· A Second and Subsequent Buyer is 4.5 percentage points more likely to default than a FTB
· A separated or divorced person is 3.9 percentage points more likely to default than a married person
· A borrower based outside Dublin is 3.7 percentage points more likely to default than a borrower based in Dublin
If the Central Bank interprets this to justify allowing first time buyers a 90% mortgage, then it follows that it would be even more justified to allow employees 90% mortgages or to allow happily married people 90% mortgages or to allow borrowers based in Dublin 90% mortgages.
An intelligent lender would incorporate all these risks into their credit model. For example, a divorced, self-employed person living outside Dublin buying for the second time, should probably require a 30% deposit. A happily married first time buyer couple, both of whom are employees should probably be allowed to borrow 90% of more than €220k if buying in Dublin.
It would be a lot simpler to impose a limit of 80% LTV and 3.5 times income but to allow the lenders to lend, say, 20% of their total lending in excess of this. The lenders can make their own commercial decisions as to whether to use that excess in lending to First Time Buyers, Dublin residents or employees.
Exceptions should be based on the lender’s total lending book and not just their lending this year
If one of the key objectives of these regulations is “to increase the resilience of the banking sectors”, then the LTV of the total book should be factored into the level of exceptions allowed.
For example, Bank of Ireland has been consistently more conservative in its lending over the years. It has a much lower proportion of its book in negative equity and high LTV mortgages. It has got a much better handle on its mortgage arrears. All in all, it could handle a future problem much better than, say permanent tsb.
If Bank of Ireland has a very low risk loan book, it should be allowed a higher level of exceptions.
If permanent tsb’s loan book is in a very bad condition, it should be severely restricted from further risky lending until it gets its total loan book into better shape.
Second time borrowers should be allowed to borrow up to 90% as long as they increase their absolute equity
There are many home owners who bought a small apartment to get their foot on the housing ladder. They are now 10 years older and have children and are still stuck in their small apartment.
If they are in negative equity, they are exempt from the LTV rules which is appropriate. They are, of course, subject to their lender’s mortgage criteria which are strict enough.
But, if they are not in negative equity, they are subject to the 80% limit.
This is inconsistent – a borrower in a worse position is exempt. It also leads to sub-optimal behaviour. These borrowers have no incentive to overpay their negative equity as to do so, would mean that they become subject to the 80% rule.
The rule should be changed to:
“Second time borrowers should be allowed to borrow up to 90% as long as they increase their absolute equity”
This improves the lender’s position as they now have a 90% LTV loan rather than a 100% LTV loan.
Of course, the LTI rules would continue to apply, so the borrower must be able to afford the repayments on a mortgage of €270k.
I fully support the principles of prudent lending. The Central Bank should resist pressure to allow reckless lending and reckless borrowing. It is not in anyone’s interest.
After the last consultation, the Central Bank buckled and allowed First Time Borrowers to borrow up to 90%. Borrowing at this level is reckless borrowing. Lending at this level where the Courts System does not allow repossessions, is reckless lending.
The Central Bank should resist such pressure and tighten the lending limits to what they originally intended.
The Central Bank cannot solve the housing problem by allowing reckless lending. It should not try to do so.
The main result of throwing more money at borrowers will be to push up the price of housing. It will have a limited impact on the supply of housing. The Central Bank does not have the power or the responsibility of solving the housing crisis.
Blaming the Central Bank is only diverting attention from the real cause of the problem – the very high cost of building new houses in Ireland. The government should focus on bringing down the cost:
· Removing VAT, taxes and other levies from newly built houses
· Reducing the specifications for starter houses
The Central Bank should not allow lending in excess of 80% LTV until the government allows banks repossess homes from people who won’t pay,
The Central Bank should make it very clear that the repossessions systems in Ireland is broken. This suits only those people who do not want to pay their mortgage as they can get away with it. It’s wrong for lenders to give 90% mortgages to borrowers who face no sanction if they choose not to pay their mortgage.
The Central Bank should make it clear to the government and to the public, that it will not allow lending in excess of 80% LTV until the banks are able to quickly repossess houses where the borrowers don’t pay.
The government should facilitate First Time Buyers to accumulate the deposit to buy a house through integrating the pensions and housing policy.
In simple terms, First Time Borrowers should be allowed “borrow” the deposit from their pension fund. The overall tax relief on pensions would not be increased. But instead of the pension fund investing in shares or investing in deposit accounts, they would invest in the person’s family home.
If this were introduced, the Central Bank could apply the 80% limit to all buyers.
The Central Bank’s justification for allowing FTBs to borrow up to 90% is not supported by its own research
In an effort to appease the criticisms of the initial proposals the Central Bank claimed that their research justified an exemption up to 90% for First Time Buyers
The research does not support this. True, the research shows that default rates are lower for First Time Buyers than Second Time Buyers. But the default rate is not the correct measure of risk. The only way to justify such an increase is to show that the banks suffer lower losses on 90% mortgages to first time buyers. And there is no evidence that this is the case.
Other research by the Central Bank shows, as expected, that losses are higher on higher Loan to Value Mortgages. So while a 90% loan to a First Time Buyer might default less, the loss, given default would be higher.
The Central Bank needs to show evidence that the 90% limit is justified by loss rates, and not just by default rates.
If the FTB’s increased loan is justified, then it should be extended to other categories of borrowers
The Central Bank’s default rate research showed the following:
· A self-employed person is 8.5 percentage points more likely to default than an employee
· A Second and Subsequent Buyer is 4.5 percentage points more likely to default than a FTB
· A separated or divorced person is 3.9 percentage points more likely to default than a married person
· A borrower based outside Dublin is 3.7 percentage points more likely to default than a borrower based in Dublin
If the Central Bank interprets this to justify allowing first time buyers a 90% mortgage, then it follows that it would be even more justified to allow employees 90% mortgages or to allow happily married people 90% mortgages or to allow borrowers based in Dublin 90% mortgages.
An intelligent lender would incorporate all these risks into their credit model. For example, a divorced, self-employed person living outside Dublin buying for the second time, should probably require a 30% deposit. A happily married first time buyer couple, both of whom are employees should probably be allowed to borrow 90% of more than €220k if buying in Dublin.
It would be a lot simpler to impose a limit of 80% LTV and 3.5 times income but to allow the lenders to lend, say, 20% of their total lending in excess of this. The lenders can make their own commercial decisions as to whether to use that excess in lending to First Time Buyers, Dublin residents or employees.
Exceptions should be based on the lender’s total lending book and not just their lending this year
If one of the key objectives of these regulations is “to increase the resilience of the banking sectors”, then the LTV of the total book should be factored into the level of exceptions allowed.
For example, Bank of Ireland has been consistently more conservative in its lending over the years. It has a much lower proportion of its book in negative equity and high LTV mortgages. It has got a much better handle on its mortgage arrears. All in all, it could handle a future problem much better than, say permanent tsb.
If Bank of Ireland has a very low risk loan book, it should be allowed a higher level of exceptions.
If permanent tsb’s loan book is in a very bad condition, it should be severely restricted from further risky lending until it gets its total loan book into better shape.
Second time borrowers should be allowed to borrow up to 90% as long as they increase their absolute equity
There are many home owners who bought a small apartment to get their foot on the housing ladder. They are now 10 years older and have children and are still stuck in their small apartment.
If they are in negative equity, they are exempt from the LTV rules which is appropriate. They are, of course, subject to their lender’s mortgage criteria which are strict enough.
But, if they are not in negative equity, they are subject to the 80% limit.
This is inconsistent – a borrower in a worse position is exempt. It also leads to sub-optimal behaviour. These borrowers have no incentive to overpay their negative equity as to do so, would mean that they become subject to the 80% rule.
The rule should be changed to:
“Second time borrowers should be allowed to borrow up to 90% as long as they increase their absolute equity”
This improves the lender’s position as they now have a 90% LTV loan rather than a 100% LTV loan.
Of course, the LTI rules would continue to apply, so the borrower must be able to afford the repayments on a mortgage of €270k.