Mr. Paul Joyce:

I thank the committee for the invitation to make a presentation. I do not want to repeat some of the things Mr. Burgess said. A number of our comments will be in a similar vein. The invitation asked us to address previous experience of mortgage insurance in Ireland. I do not think there is significant experience from a consumer perspective of mortgage insurance schemes, but we have experience of mortgage protection insurance, which is mandatory under consumer credit legislation and it is the lender which must ensure that life protection is in place.
In a number of instances of which we are aware, those policies have lapsed due to people falling into arrears, as have buildings and house contents insurance on existing mortgages. The consequences of that for borrowers are important to understand. During the boom years a number of people took out optional insurance policies such as critical illness cover, redundancy insurance and so on. Members will be aware of the difficulties that have occurred with some of those policies in terms of people understanding the restrictions on the policies with which they have become involved. There are a number of associated costs with servicing a mortgage, quite apart from the monthly instalment. That is relevant to the question of mortgage insurance in particular because, as Mr. Burgess said, although the policy is taken out in the lender's name, in effect the cost of the premium is bourne by the borrower, one way or another.
We understand that the reason the committee is considering this issue is in the context of the Central Bank's consultation paper on a macro prudential policy for residential mortgage lending. There has been a lot of concern about the 20% deposit in terms of the LTV ratio. As Mr. Burgess said, the mortgage insurance scheme can be used to mitigate that 20% rule by the lender taking out a policy to cover 10% of it. In theory, it would appear that everybody would benefit from this, in the sense that a borrower with a good credit history would not have to build up such a large deposit and the lender is covered for a portion of the loan in the event of some cyclical swing in property values and so on. There is the ongoing effect of boosting the construction industry on the face of it.
The example of Canada is often cited and Genworth Financial, which was before the committee today, had an involvement in the Canadian market. In our submission we included a couple of comments. One is from the Canada Mortgage and Housing Corporation, CMHC, and explains the product on its website. It states:

To obtain CMHC Mortgage Loan Insurance, lenders pay an insurance premium. Typically, your lender will pass these costs on to you. Your lender will give you the exact price when you apply for a mortgage. The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment.

The economist, Jim Power, published a paper recently in conjunction with the Genworth financial breakfast where the virtues of mortgage insurance schemes were extolled, and it was suggested that mortgage insurance should be left to the private sector through a mortgage insurance model rather than be backed by the State. In the absence of a State-backed scheme, it is clear that the cost of such a scheme would reflect on the borrower's capacity to pay. In the context of the Central Bank's consultation paper that this has an effect on the loan-to-income, LTI, debt-to-income, DTI, and debt-servicing-to-income, DSTI, aspects of the paper, it recommended a 3.5 times loan-to-income ratio. The bank is suggesting that this equates to a maximum of 40% of take-home pay being paid on accommodation costs. We already think that is quite high. The international standard would generally tend to be one third. However, when one adds in insurance - life cover and optional insurance - and if the borrower also has to pay for mortgage insurance for the lender, then the affordability problem becomes more apparent.
The question is who benefits from the mitigation of the risk. One of the purposes of the insurance is to compensate the lender, or investor who has bought a package of mortgages, where the borrower becomes unable to make full payments. I understand from Canada that in these instances the property is often repossessed. An issue for the committee to consider is whether the introduction of such a scheme would prevent house repossessions in the event of default.
The concluding part of the submission contains a quote from a recent article we saw in a Canadian business journal, The Globe and Mail. It is an interesting article because it references the announcement by the Government of the 75 action points to kick-start and reinvigorate the construction industry. Interestingly, the title of the article is "Canada should learn from Ireland’s housing crash". It explains that the bank is required to buy the insurance in Canada but it makes the home buyer pay the premiums. The insurance pays the bank back if the home buyer defaults. The buyer loses their house, while the bank recoups everything that was owed on the mortgage. I take it this is a reputable journal. The article says that the insurance therefore encourages banks to lend bigger and riskier mortgages than they otherwise would.. According to the author of the article, the scheme seems to have had an effect on house prices in Canada. The author concludes the article by saying that Canada might benefit from some of the lessons that Ireland has learned the hard way. She says, these include "the dangers that stem from a lack of adequate data to study the housing market, the dangers of promoting the idea that home ownership is almost always preferable to renting, the dangers of relying on construction for economic growth and, importantly, the dangers of assuring people that a soft landing is on the horizon".