Mr. Karl Deeter:

My name is Karl and I work in credit so what we are talking about today is what I do for a living. My actual role is described by the Central Bank for English speakers as the pre-approved controlled function. That means I work mainly in compliance, which sets out the rules of how the financial system works and the ways one should and should not behave. I would like to think that it gives me some insight into this subject.

Our main job in residential lending, which is to help families to buy homes, and by and large that is what we do. We have done it successfully for more than a decade. When I hear people talk about issues and the impact on first-time buyers, it concerns me. We are the ones who face these people and we know their issues. We see how hard it is to save for a house at a time when one might have children, when the banks underwrite against people who have children, and when there is higher taxation. Those are all things that make it difficult. It does not help the people who are impacted by it to make it more difficult in order to get some approved ideological outcome. Yesterday, I heard that only 2,800 first-time buyers will be affected by the proposed changes. That is not an accurate reflection of the gross number because if one looks at the number of people borrowing, people in negative equity can be affected by this. There is an exemption in it for people with negative equity but not on the new loan, so they will be in there. People who remortgage, who might want to do up their house, will be competing for the same limited number of higher loan-to-value loans. To say only 2,800 people will be affected is taking the minimal data figure one can get away with and still be telling the truth, and inferring that is the size of the problem when it is not.

I also do not know whether it is the role of regulation to create a market for a private insurer. That does not sit well with me. I do not say that not having mortgage insurance is good but equally, to open the doors for firms to come in means there is a layer of cost attached. Insurance is not altruism and it never was. It will come at a cost. When we talk about preventing people from hurting themselves, I still refuse to believe that the majority of people are too thick to make good decisions. Generally, what has happened is people have been hit with job losses, rising taxation and increased costs, which caused compression. A lot of mortgages are quite sustainable as people are on trackers, and even they are going into arrears. Unemployment does not explain that because in 80% of households with arrears there is no unemployed adult, which means there are other forces at play. Going into this crisis we did not have things like the Insolvency Service of Ireland that could deal with secured debt. Neither did we have a reformed bankruptcy process. We have that now, so if we are going to try to future-proof things, it does not mean one has to do it in credit, because we do not have a credit bubble - what we have is a housing shortage. The vacancies in Dublin City Council at the moment are the lowest they have been since it first kept statistics. It is just under 1.5%. The last time we had this few houses available was in the early 1800s. That is where one is seeing it on the social housing side. When one does not have enough houses to apply a macro tool on credit, when lending is at about one tenth of what it was at the peak and when the volumes are back where they were in the early 1970s, what is proposed is the wrong medicine for the job. That is the fact of the matter. It is also not going to prevent a boom and bust scenario. There are several reasons for that.

I have been involved in a project - Ronan Lyons is working on a similar one - looking at house prices going back over time. We had boom and bust scenarios in the 1700s when there was not a mortgage market and likewise in the 1800s. Normally, an under-investment in housing causes compression and causes prices to rise. In the past that helped to create tenements because people piled into the same existing stock. I hope we can avoid that. One of the nice things about modern society is that we should have better tools to get ahead, but that is the kind of outcome that has been there. When one looks at Hong Kong, which has been in such a situation since 1991, there have been two spectacular boom and bust cycles in the same period. Canadian house prices have gone out of kilter. In Sweden house prices are spiralling out of control even though a cap on loan-to-value has been introduced. People are actually taking risky loans to get around it.

We should probably not be having this conversation. The Central Bank plan should not go ahead and neither should the plans for mortgage indemnity. I have worked in this area for a long time and the lending we are doing now is very responsible and prudent. One could do things that already exist in legislation such as increase the stress tests that go on loans when they are stressed to see what would happen if rates change. If one increased that, one would probably make it safer, without any of what has been proposed. If one wants to introduce insurance, then let it be for the things that hurt people such as job loss. One solutions would be if everyone who took out a mortgage had to pay a certain small amount of the mortgage repayment, whether the loan is performing or not, towards a fund that would help cover a mortgage for a period should one lose one's job, and that was triggered when one went into the mortgage arrears resolution process. Such a scheme, which could be easily set up and run by the State, the banks or whoever, would save a lot more people than this scheme. When repossession triggers the pay-out, then that means we will have to repossess houses a lot. We do not want that. The Central Bank brought out rules which included a ban on repossessions, which was a failed concept brought in from Hungary, and then the code of conduct on mortgage arrears, which is seen internationally as one of the worst pieces of financial regulation not only in Europe or among OECD countries, but in the world. That is what we are up against. Repossession will not work.

Equally, institutions like Genworth were highly in favour of the code of conduct on mortgage arrears because it would prevent it having to pay out. There will always be times of booms and bust. Homeownership creates wealth in households. It is one of the biggest forms of wealth in the world. For people who start off with nothing and succeed in owning their own home, the generation following them tends to do better. That is the empirical evidence. To lock people out from owing their own home, which is what this proposal will do, is to deny them a better financial future.

We are also not making very good comparisons. Much of what is being spoken about is being spoken about in isolation and is not well placed to be looked at here. In Canada, the main provider is the Canadian Home and Mortgage Corporation, which is a state-backed body that has an implicit state guarantee. We are talking not about doing that but about bringing in insurance firms from mainland Europe to do this. That is not to suggest that the Canadian system is better but structurally it is quite different.

On rising house prices and what is proposed, a worse correlation between the two could not be made. They are two distinctly different issues. What is proposed will not solve or fix anything. I created a financial calculator to examine what would be the impact of what is proposed on borrowers. Even if prices rose by about one third of what the ESRI predicts, the cost of staying out of the market and meeting the cost of rising rents while continuing to save to get together a large deposit is a brand of austerity which most households could not endure. Those who did so would still be €100,000 worse off at the end of the day. Again, the role of regulation is not to make the citizens of a country poor. Having said that, I do not know if there is an ideal answer. What I do know is that this idea is wrong. I know this because I have been working in this area for a long time. In the past, we had mortgage indemnity guarantees, the cost of which was always passed on. These were later done away with. I think KBC was the last to stop doing them in 2004. As loans get older they tend to become safer. In this instance, there will not even be an opportunity for loans to get older because they are not sufficient houses to buy, which is the reason approvals are increasing but draw-downs are not. We should be focusing on housing people who cannot afford to house themselves and on building houses for people who can afford to buy them. If we focused on that and did it well this whole conversation would be seen for the misplaced concept that it is.