Brendan Burgess
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the frontbench is proposing counter-measures aimed at incentivising and subsidising borrowing which would undermine the Central Bank's new rules.Worse again, the government's proposal would leave taxpayers picking up the tab when people who borrow too much can't pay it back.
That the Government is proposing to incentivise and subsidise borrowing for property purposes beggars belief after all that has happened. If the Coalition could just about get away with claiming that the premature return to give-away budgets does not mean that it has failed to learn the lessons of past budgetary mismanagement, the mortgage guarantee proposal takes the biscuit when it comes to showing how little has been learnt about the dangers of bad bank lending.
the Taoiseach cited approvingly the Canadian government's mortgage insurance scheme. If that is supposed to provide supporting evidence for the plan, it doesn't.
Canada is one of only a handful of developed countries where the property bubble warning lights are flashing. While the country's subsidisation of borrowing in this way is certainly not the only factor in the large and protracted rise in Canadian house prices, it is a factor. Little wonder then that as recently as last May, the IMF suggested scrapping the scheme in an in-depth report on the risks of a crash in that country.
Allowing first-time buyers to avail of mortgage insurance to plug the gap opened up as a result of the Central Bank’s proposals to increase a deposit to 20 per cent is a “good idea”, Minister for Finance Michael Noonan told the Dail this morning.
Mr Noonan said that he has asked a parliamentary committee to prepare a report on such an insurance, noting that it would be the private sector, rather than the government, that would offer it.
His comments come on the back of amove by the Central Bank to impose more stringent lending requirements, which, it is feared, will prevent many first-time buyers from getting on the property ladder. The Central Bank has proposed that it will increase the minimum loan-to-value of mortgage lending to 20 per cent, and cap the income multiple to 3.5, for the majority of mortgage lending.
Mortgage insurance is available in many countries but is currently used extensively in Australia, Canada, France, Hong Kong, Netherlands and the United States. It is an insurance product banks and building societies take out to protect themselves for any losses suffered as a result of a borrower defaulting on their mortgage and being unable to repay the outstanding debt with the proceeds of the sale of the property. US financial group Genworth Financial has in the past called for the introduction of such a product in Ireland.
While it is not yet clear how the product would work in conjunction with the proposed lending restrictions, in principle the product works by allowing a bank to lend 90 per cent of a purchase price to an individual. The individual then puts down a 10 per cent deposit, while a further 10 per cent of the mortgage is insured by a third party. The cost of the insurance is typically borne by the borrower.
The core rationale for this requirement is to avoid a scenario where the value of a PPR drops to the extend that it is in negative equity. This is most easily resolved by application of an insurance scheme which has been discussed both on this forum and generally. All indications are that there would be firms who would take on this risk at an affordable level of premium.
The issue has nothing to do with affordability, nor should it as the same rule would apply to a 100K mortgage as to a 1mln mortgage. I don't understand why there is a reluctance to apply this system or to seriously assess the option!
The issue has nothing to do with affordability,
However provided that the insurers medium term ability to cover the 10% potential payout is adequately assessed then there is no logical reason for excluding MII cover as part of the overall LTV limit. I.e. In both circumstances the risk of a >20% reduction in property price is covered.
I'm not and never was an advocate for the Banks. However, I do see the logic and rationale of risk based pricing, whether that be in banking or insurance.It seems to me that you are looking at this from the lender's point of view. Of course the lender would love to be able to lend at 4.5% and get the customer to pay a premium for 10% loss. (I suspect that the lender would pocket a big lump of the premium in commission as well)
I get back to my main point. If the Central Bank decides that 90% is the appropriate, prudent level of lending, then they should allow it. There would be no need for MII.
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