Dr. Michelle Norris:

I thank the Chairman and members of the committee for inviting me and my colleagues here to address them today. My name is Michelle Norris and I am the chairman of the Housing Finance Agency, HFA. I would like to introduce my colleagues again. I am joined by Mr. Barry O'Leary, who is the chief executive officer of the agency, Mr. Tom Conroy, who is the company secretary and financial controller, and Mr. Philip Nugent, who is a board member and non-executive director of the agency and a principal officer in the planning and housing policy and finance section of the Department of the Environment, Community and Local Government.

I will start by outlining the functions of the agency and our mission. The agency was established in 1982 and its function is to advance loan finance to local authorities and voluntary housing bodies to be used by them to fulfil their functions under the Housing Acts. We borrow or raise funds for these purposes to lend on. Our mission is to source and structure the loan finance in the most cost-efficient manner possible. The agency is not funded directly by the Exchequer but is a self-financing organisation, funded by a small charge on each of its loans. The agency does not formulate housing policy, which is the reserve of the Minister for the Environment, Community and Local Government, but simply implements it. The Government guarantee on the agency's borrowings enables it to raise funds at very low interest rates. The total outstanding loan book of the agency, as of 31 December 2011, was €4.4 billion.

In terms of the structure of the agency, the board is appointed by the Minister for the Environment, Community and Local Government with the consent of the Minister for Public Expenditure and Reform. The term of membership is generally five years.

The board normally consists of 12 members, including a serving county manager and representatives from the private sector. It also includes a senior official from the Departments of the Environment, Community and Local Government and Finance.

The directors of the agency are committed to maintaining the highest standards of corporate governance. We follow corporate governance principles for companies, known as the UK Corporate Governance Code 2010, and the code of practice for the governance of State bodies as published by the Department of Finance. The board has established a performance review committee which evaluates its own performance and those of individual directors.

The principal function of the agency is to raise finance which we lend on to local authorities and housing associations for their functions under the Housing Acts. The details of what we fund have changed since we were first established, reflecting changing Government policy and needs among clients of local authorities and the voluntary housing sector. The agency was originally set up to operate a specific scheme of income-related mortgage loans which allowed 16,000 households to acquire houses between 1982 and 1986, but our remit has been widened in the intervening period. In 1986 we were given responsibility for funding all local authority house purchase loans and since 1992 we have funded the shared ownership scheme, which enabled lower income households to buy houses, and the capital loan and subsidy scheme, which until recently was one of the main schemes for funding the provision of social housing by voluntary bodies. In 2002, we were given powers to lend to local authorities for water, waste and environmental projects, and to lend directly to voluntary housing bodies. Previously we lent to local authorities and they lent the money on to voluntary bodies.

The agency categorises its business into the following two broad areas: mortgage business, which accounted for €1.4 billion as of 31 December 2011 and 32% of total outstanding loans; and non-mortgage business, which was about €3 billion at year end and 68% of the total. Of the mortgage-related business loans, 82% are variable-rate annuity loans, 9% are older income-related loans and shared ownership loans and 9% are fixed-rate loans. In total, these schemes lend to about 25,000 households. Non-mortgage business covers the wholesale aspects of housing by local authorities, such as support for the voluntary housing sector, land acquisition, bridging finance and projects ancillary to and supportive of housing.

While we have been empowered to lend to voluntary housing bodies since 2002, we only recently began to do so as capital grants from central government, which was the traditional source of funding for these bodies, became more difficult for the State to finance. Powers for such lending are enshrined in section 23 of the Housing (Miscellaneous Provisions) Act 2002. To date the agency has received 17 applications from voluntary housing bodies for certified borrower status - in other words, eligibility to borrow from the agency. Of these 17 applications, four have been approved, eight rejected, and five are pending a decision by the agency’s credit committee. Once voluntary housing bodies achieve approved borrower status they can then apply to us to borrow for particular schemes. To date, we have approved applications from four certified voluntary housing bodies to borrow to the value of €14 million.

I am sure the committee will be interested to know how we set and manage our interest rates. The agency has adopted a policy that sets interest rates at the lowest level commensurate with its costs, thus effectively operating on a break-even basis. On mortgage-related rates, interest rates are set to ensure the agency can meet its costs from its operations. We also have regard to the level of average rates generally in the market. The current variable rate to the borrower, excluding mortgage protection insurance costs, is 2.75%. Historically the rate was approximately 0.5% below the average comparable market rate; currently, it is about 1.5% below it, which offers borrowers a significant saving in the current economic climate. Our non-mortgage-related variable interest rate is closely tied to our ongoing cost of funds. We achieve this by setting the rate monthly in arrears once our costs are known for that month. The average rate for 2011 was 2.34%, which was significantly less than average private sector finance rates, where they were available.

Ordinarily, the agency funds its operations by borrowing on the domestic and international capital markets. For funding housing-related loans, all our borrowings are State-guaranteed and our borrowing limit was increased to €10 billion in the Housing (Miscellaneous Provisions) Act 2009, which should be sufficient for the foreseeable future. The majority of the agency’s loans have a variable-rate structure and hence its funding has traditionally matched this through use of a State-guaranteed €6 billion euro commercial paper, ECP, programme. However, as the sovereign began to experience difficulties in borrowing on international markets during 2007 and 2008, the agency encountered similar difficulties which led to unfavourable conditions for issuing under the agency’s ECP programme. An alternative source of floating rate funding became available in 2011 through the multilateral EU-IMF programme of financial support for Ireland, via the NTMA. This programme, with a capacity of €4.5 billion, is more than sufficient to cover the agency’s variable funding needs at present. The agency also utilises the guaranteed notes, GN, programme to provide local authorities with an investment facility for their surplus cash, offering competitive interest rates. In 2011, the agency dealt with 24 local authorities in this area of its business and the average weekly turnover of investments grew by 12% to €173 million in 2011. As well as providing a cost-effective and flexible service to our customers, the facility is another source of funding for the agency. Our other debt consists of fixed-rate and index-linked bonds totalling some €287 million and domestic commercial paper.

This level of fund-raising and lending to local authorities and voluntary housing bodies clearly raises risk management issues. The agency’s board closely oversees its risk and its risk management framework and policy is a standing agenda item at its meetings. The agency’s risk management policies are set out in its annual report.

An important element of the agency's financial risk, and a major factor in our efforts to build up reserves, is the long-standing mismatch in our index-linked and older fixed-rate books. This is a legacy of the old Irish pound regime of more than 20 years ago, when it was not as easy to structure debt in a flexible way as it is now. As a result, there is an overhang of index-linked and fixed-rate bonds over the matching loans to borrowers, which will result in a cost to the agency arising until 2018 when the last bond matures. We have had a policy for many years of building up reserves to cover these costs.

The agency has a staff of 14 people which, taking account of job-sharing arrangements, equates to 11 whole-time equivalents. This complement was reduced by one in 2010, bringing staff numbers back to 2002 levels. Since 2002, the number of loans dealt with has increased by 90% and the total loan book has grown from €2.4 billion to €4.4 billion. We have managed to take on and manage these additional responsibilities with the same number of staff. The annual administration budget for the agency accounts for some 0.035% of the total outstanding loan book as at 31 December 2011. Most of our business is carried out through a dedicated custom-built members' website, which allows for loan advances and treasury dealing to be done online. This involves co-operation between the agency, local authorities and the Department.

As I have stated, the agency is a self-financing body and is not in receipt of Exchequer funds. The agency made a surplus of €3.6 million in 2011. We expect to see an overall surplus of some €15.2 million for 2012, thereby increasing reserves to approximately €74.3 million. This extra profitability is due to an unexpected low cost of funds, as a result of the settling of the markets since the latest European Central Bank base rate decrease in July 2012.

I will conclude with a brief outline of the challenges facing the agency in the coming years and my priorities as chairman. The main challenge for the board will be in securing suitable funding to allow us to continue to meet the changing needs of our customers. During the period covered by our corporate plan, the State is expected to return to the market for its borrowing requirements. The agency, in turn, will seek to resume the use of its euro commercial paper, ECP, programme. We will continue to enable local authorities to manage their loan portfolios by continuing to offer flexible loan structures. Examples of such structures currently being offered include extending current mortgage loan terms, allowing interest-only loan periods, and allowing interest-only loan periods with partial redemptions, in line with flexible terms being offered by local authorities to distressed borrowers. We will also seek to maintain and improve, where possible, the credit risk management structure we have in place to assist us in lending to approved housing bodies. The latter is preferable to lending indirectly via local authorities, as we did in the past, which raises additional risks for the agency.

I hope this brief overview has provided a useful background for questions or comments from members relating to our activities.