The effective ban on repossessions hits potential homebuyers as well!

Brendan Burgess

Brendan Burgess

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Professor Greg Connor has an interesting post on Irish Economy.ie

Here is the relevant excerpt:

Consider a young Irish household wishing to buy a family home using mortgage finance. In exchange for a mortgage loan, they might be willing to take a chance that they lose the house in some future scenarios if things turned out badly and they could not pay the loan back. They want a house now and are willing to take a chance on the future. Such a mortgage contract is not legally available to them in Ireland nowadays, since repossession can only be enforced in ridiculously limited circumstances and, due to this legal reality, banks are not allowed to issue mortgage loans unless they are virtually default-risk-free. The young household will have to rent or live with parents, for many years into their future.


The Irish financial system, where there is virtually no chance of receiving a default-risky mortgage and even less chance that such a loan could end with repossession, is not of benefit to all. For many people in many circumstances, risk is good.
 
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It's an interesting take. I haven't read the full post, but we should note that various CBI rules/protections have also effectively removed the ability to lend to a 'risk' even if repossessions were a norm here.
 
Hi Red,

This was my response to Greg's article

Hi Greg

“The Irish financial system, where there is virtually no chance of receiving a default-risky mortgage”

A borrower in Ireland can still get a 90% mortgage on 3.5 times their joint income. That is very “default-risky” for the bank. It’s not risky for the borrower, in that there is no penalty for default.

This would make no sense in a normal market charging eurozone-average mortgage rates. But as Ireland’s lenders charge almost double the eurozone average mortgage rates, they can afford a high level of defaults of these mortgages.

So I am not sure that the lack of repossession has reduced the supply of mortgage finance. It has just pushed up the price for everyone.

Brendan
 
Brendan Burgess said:
A borrower in Ireland can still get a 90% mortgage on 3.5 times their joint income. That is very “default-risky” for the bank.
Click to expand...

I am surprised you see that as risky for the bank. Is it not a much more conservative framework than applies in other countries, or applied in Ireland pre-boom.
 
cremeegg said:
I am surprised you see that as risky for the bank.
Click to expand...

Hi cremeegg

In every other country, they can repossess the house if the borrower does not repay the mortgage. The realisation that the bank can do that means that the borrowers are more incentivised to pay their mortgage.

Handing out 90% mortgages in Ireland is extremely risky. But it's profitable because they charge everyone 1.5% points to pay for it.

Brendan
 
Brendan,

Possible solution for banks is to increase the % payout to them regarding credit default mortgage insurance
 
I don't believe people should keep a house they don't pay mortgage on .- it's fine to give people some sort of a break . but not one that goes on forever,!!! You can't keep a car if you don't pay, you don't have health insurance if you don't pay, you don't get groceries without paying!! Why should you expect a house without paying. It annoys me because its a case for some of won't pay CU's I don't have to pay. But someone somewhere always ends up paying
 
IdesofMarch said:
Possible solution for banks is to increase the % payout to them regarding credit default mortgage insurance
Click to expand...

That would have no effect.

The cost would still be passed on to the other borrowers.

I think that the insurers would be very slow to insure 90% LTV mortgages in Ireland.

Even with the disaster of the last 10 years, they rarely paid out.

Brendan
 
Brendan Burgess said:
That would have no effect.

The cost would still be passed on to the other borrowers.

I think that the insurers would be very slow to insure 90% LTV mortgages in Ireland.

Even with the disaster of the last 10 years, they rarely paid out.

Brendan
Click to expand...

Brendan, I wasn't aware of anyone offering mortgage default protection insurance in Ireland. Is there someone offering it?
 
The lenders used to take out something called a Mortgage Indemnity Guarantee. The insurer would indemnify the lender if the borrower defaulted. The cost was usually passed on to the borrower although the borrower would still have owed the money if they defaulted.

Due to the competitive market, they stopped charging for it. Then the lenders stopped taking it out. I think that KBC and the EBS were the last to have the insurance. But there were very few actual claims paid. EBS and the insurance company claimed that the existence of the insurance allowed EBS to do deals with the permission of the insurance company, e.g. write off the shortfall.

But I understood from bankers that it was very difficult to meet the criteria for a successful claim.

Brendan
 
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