Oireachtas Joint and Select Committees
Thursday, 27 November 2014
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Mortgage Insurance Schemes: Discussion
The committee will consider mortgage insurance, MI, in an Irish context. In October, the Minister for Finance wrote to the committee requesting that it look at a possible role for mortgage insurance in the Irish housing market and its impact on various stakeholders. He asked the committee if it would consider the previous experience of mortgage insurance in Ireland, the models adopted and the experience of other jurisdictions. Given the good work the committee has done on mortgage arrears and its concern that Ireland learns from past mistakes, it is appropriate and timely to examine innovations that may lead to greater stability in the banking sector and to greater protections for citizens.
We have invited a number of witnesses to discuss the issue of mortgage insurance. This session will include submissions from some of those involved in the provision of MI while the afternoon session will have a greater focus on consumer issues. The format of the meeting will be a round table discussion. I welcome the witnesses who will make their opening statements in the following order: Mr. Angel Mas, president and chief executive officer, and Mr. Simon Crone, vice president and commercial leader, Genworth Mortgage Insurance Europe; Mr. Joe Leddin, consultant, and Mr. Stephen Rance, JLT Insurance Brokers Limited; and Mr. Michael Bennett, chief actuary and chief risk officer and Mr. Florian Mayer, compliance officer, Arch Mortgage Insurance Ltd. When all the witnesses have made their opening statements, a question and answer session will ensue. Given the time constraints, I would like to ensure we have a constructive discussion. I will, therefore, insist that all opening statements are a maximum of five minutes. Witnesses have been advised by the committee secretariat that I will stop them if they exceed this time limit. I remind members, witnesses and those in the Visitors Gallery gallery that all mobile telephones must be switched off.
I wish to advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
I invite Mr. Mas to make his contribution.
Mr. Angel Mas:
I thank the Chairman for the invitation to appear before the committee to discuss the role that mortgage insurance can play in Ireland. Genworth Financial is the only global leader in the provision of MI for residential mortgages with a market presence in 15 countries. Our global reach across a range of jurisdictions and over a number of different housing cycles gives us a particular insight into how MI can operate under different conditions. Genworth Financial has a substantial presence in Ireland.
Last Monday, the Taoiseach opened our new international business centre in Shannon, where over 400 colleagues service Genworth's Irish and international operations.
We have provided MI to lenders for more than 70,000 borrowers in Ireland since early 2000. We have first-hand experience of operating in Ireland. The current focus on MI in Ireland directly arises from the recent consultation process with the Central Bank, which proposes to introduce certain caps for mortgages. There is much in the Central Bank consultation with which we agree. It is important that there is proper supervision on the granting of new mortgages, particularly for high loan to value, LTV, mortgages. While the Central Bank proposals on LTV restrictions have been welcomed, there is concern that the proposed measures will have unintended consequences. In particular, there is fear that new measures will deprive creditworthy purchasers of the capacity to buy their first home. This could arise as a result of the inability of a purchaser to raise a 20% deposit, or as a consequence of the cap imposed on the number of high LTV mortgages that a bank can provide. Once the 15% quota of mortgage allocations is used up, no more high LTV mortgages can be provided, regardless of the creditworthiness of the potential homeowner. Given that high LTV represented approximately 50% of the mortgage market last year, a significant number of consumers will be excluded from the market and forced to wait an additional three to five years before becoming homeowners, if they are ever able to. MI has an important role to play in facilitating prudent and sustainable regulation, while still facilitating home ownership for creditworthy first time buyers.
MI allows lenders to reduce the risk associated with high LTV mortgages by insuring the top tranche of the home loan. For example, a lender who has an MI policy in place will be able to insure the first 15% to 20% of the value of a home being used as security of a loan. The MI policy has various benefits for the system, lender and borrower. It reduces the risk to the lender of providing a high LTV loan given that the top 15% value of the property is covered. Given that the mortgage is covered by a credit risk mitigant, the lender has to put less capital against the high LTV loan. Consequently, it is less expensive to provide the loan to the consumer. The lender benefits because the loan application is scrutinised by a second pair of eyes. The insurance company assesses the risk, and has an alignment of interest in the quality of it.
The lender and the insurer work together to ensure that borrowers are kept in their homes when they get into mortgage arrears. The MI policy is not just about paying out when a house is repossessed and sold. The MI provider works with the lender and the borrower to restructure loans that have gone into default with the objective of ensuring that the homeowner remains in his or her home. This involves the insurer making payments to the lender to facilitate a restructure. For example, in Ireland over the last five years we have worked with lenders to keep 15,000 families in their homes ahead of foreclosure and have paid over €70 million to facilitate this happening, with a further €40 million expected to be paid in the future. MI also has significant benefits for consumers. It enables people who would otherwise have been excluded from home ownership to access a family home with a reduced deposit. It can also assist in reducing the cost of credit given the lower capital cost of a mortgage carrying MI. There is the added comfort of knowing that in the event that the loan gets into difficulty there is a willing insurer prepared to work to keep the borrower and family in the home.
MI is nothing novel or new. It is a well trusted international instrument that has been used successfully in a number of jurisdictions to facilitate prudent lending. MI is used extensively in Canada, Australia, Hong Kong, the Netherlands, Italy, France, Mexico and the United States. MI or mortgage indemnity bonds were also prevalent in Ireland as a matter of practice before the property boom. Regrettably, as some lenders sought to encourage new business during the boom, they dispensed with the requirement for an indemnity bond to be in place and there was no regulatory compulsion for them to insist on one. Caution and prudence suffered in a market that ran ahead of itself. Had MI been prevalent in Ireland, it could have saved approximately €1.7 billion of losses to Irish lending institutions.
I am conscious of the limited time. I encourage the committee to recognise the positive and responsible contribution MI can make in Ireland. There is plenty of international capacity for MI in a new, regulated landscape and the reinsurance market is also very alive and active internationally. MI will facilitate responsible lending with proper mitigation of risk. For the State and Central Bank, it can also work as a macro prudential tool to control systemic risk. This is why we believe the new LTV limits and the 15% quota for high LTV lending proposed by the Central Bank should be flexible to accommodate creditworthy first-time buyers. In such circumstances, it would be harsh to limit access to mortgages as a result of a quota.
It is important to define public policy around first-time buyers. First-time buyers do not usually cause rapid home price appreciation. Recent home price appreciation in Ireland has occurred mostly in above average upper market property and areas. It did not require substantial credit availability, much less high LTV. First-time buyers' products and the benefits associated cold be bound by age or property value to ensure they do not contribute to the most aggressive price increases. Creditworthy first time buyers' access to credit should not be subject to quotas. First time buyers require high LTV, low deposit loans, and, even when prudently originated, those loans represent a significant systemic risk, which can and should be mitigated with a specific and internationally tested and recognised solution.
Mr. Joe Leddin:
I thank the committee for inviting us here. I am here with my colleague, Mr. Stephen Rance, from our London office. I work with JLT, which advises companies and governments on insurance matters across 135 countries. Our expertise in the construction sector has led to our becoming the largest construction insurance broker in the world. The Irish housing market is not functioning effectively. As a company that advises globally, we believe the solution is relatively simple. The key issue is risk and how it is regulated. Nobody wants to return to the housing bubble. The current mechanism for regulating risk in the market, particularly the proposed mechanism that most borrowers, unless privileged, would have to provide a 20% deposit, is too crude an instrument and would serve to exacerbate the problems already evident. There is an alternative. Rather than reducing risk by restricting first-time buyers' access to the market, one could insure against the risk. The remedy is to introduce a mortgage indemnity guarantee scheme which would protect the banks against the risk of loss in the event of a fall in house prices.
Most of the people who will address the committee today will suggest, as we do, that the solution is an insurance product. The question is who should carry the cost. Under the system we propose, there would be no cost to the State. The bill would go to the banks, which would pay a once-off premium to insure against a fall in house prices of up to 30%. Mortgage indemnity guarantees, MIGs, are being considered by the Central Bank, which, last month, suggested that people buying a house from a bank with a MIG in place could be exempt from the proposed 80% LTV restriction. The Central Bank's principal concern is that such products be provided by highly-rated companies. We agree, and would go further, suggesting all MIGs should be provided not by one company but by a pool of companies, all of which have an minimum credit rating of A. The key point is that pooling reduces the risk even further. Equally, such A rated plus insurers should be in a number of markets, not depending solely on mortgage risk.
Under current proposals for dealing with the issue of mortgage risk, namely, the LTV restrictions, the banks would be fully liable for the first 80% of the value of the property.
If MIGS were implemented as we are proposing this would see banks exposed only to the first 70% of the value of the property. Aside from providing greater risk cover to the banks operating in the Irish market and doing away with the need for young house-buyers to come up with 20% deposits, MIGS would also provide a very valuable but very simple regulatory tool to the Central Bank. By setting the level of MIGS in the market the Central Bank can effectively ease or restrict access to the housing market. One could think of MIGS as being the Central Bank's thermostat.
In advance of addressing the committee today, JLT has held detailed discussions with the Construction Industry Federation, the banks and equity funds looking at the Irish market. All are agreed that MIGS would act as a very effective stimulus to the new homes market. In particular, the companies, including banks, which fund builders, have told us that the introduction of MIGS to the Irish market would greatly free up the availability of finance to Irish builders. In every other country where MIGS were introduced, they have served to facilitate credit flow to builders. I do not wish to prompt a detailed discussion about the banks' capital requirements but under BASEL rules the introduction of MIGS would relieve the capital requirements on Irish banks.
MIGS have already been considered by the Irish Central Bank would remove the need for first-time buyers to come up with onerous deposits. They would significantly reduce the risk to banks operating in the Irish mortgage market; they would reduce the risk to the Irish economy of an overheating of the property market; they would give the Central Bank a very effective tool to restrict or promote access to the market place. This would allow banks to pass on the savings to customers which come from reduced risk. If 100% of the savings were passed on directly, we believe the average mortgage rate in the Irish market could fall by up to 2%. MIGS would provide an immediate proven boost to builders, particularly those building for the new home and rental markets. All of the above would be at no cost to the Exchequer, as all costs would be borne by the market.
Mr. Michael Bennett:
I thank the Chairman and members of the committee, the invitation extended to Arch to attend this meeting. I am accompanied by my colleague, Mr. Florian Mayer. I will provide a brief introduction to Arch Capital, discuss the benefits of mortgage insurance and how the cost to consumers can be minimised.
Arch Capital Group Limited, is a Bermuda public limited liability company with approximately $6.98 billion in capital at 30 September 2014. Arch Capital is a NASDAQ listed company. Through its operations in Bermuda, the United States, Europe and Canada, Arch Capital writes specialty lines of property and casualty insurance and reinsurance, as well as mortgage insurance and reinsurance, on a worldwide basis. Arch Reinsurance Limited, the main insurance risk-bearing entity in Arch Capital has financial strength ratings of A1-, or outlook stable, from Moody’s; A+, outlook stable, from A.M. Best Company; A+, outlook stable, from Standard & Poor’s; and A+, outlook positive, from Fitch Ratings.
In 2009, in the aftermath of the global financial crisis, Arch Capital began to recruit its mortgage insurance team. The Arch mortgage insurance team has now more than 375 employees worldwide. The Arch mortgage insurance team is dedicated to providing risk management and risk financing products to lenders worldwide, through its three distinct platforms in the United States, Europe and Bermuda.
Our group of dedicated mortgage insurance and reinsurance professionals understands the unique requirements and challenges of mortgage insurance markets around the globe. Our market-specific knowledge and expertise enables our teams to provide creative and commercially viable solutions for our clients. Superior analytics and risk assessment, combined with outstanding client service, are at the forefront of all our activities.
In 2013, Arch Capital developed and delivered the first insurance contract on the Freddie Mac agency credit insurance structure. Freddie Mac is a US public Government-sponsored enterprise which seeks to reduce its risk exposure by obtaining insurance protection from private insurers. In 2014, Arch Capital completed the acquisition of CMG MI, a US mortgage insurer which is the leading provider of mortgage insurance to the US credit union sector.
Arch Capital established its presence in Ireland in 2008 and currently employs over 40 people through its subsidiary operations based at offices in Dublin and branches in Europe. In 2011, Arch Mortgage Insurance Limited was established. Arch Mortgage Insurance Limited is a mortgage insurer regulated by the Central Bank of Ireland and authorised to write mortgage insurance - non-life insurance class 14, credit insurance - in a number of EU member states on a freedom of services basis. Arch Mortgage Insurance Limited has financial strength rating of A plus - outlook stable - from Standard & Poor’s.
Mortgage insurance increases the resilience of the banking sector to property shocks by providing additional capital to absorb losses from stressed economic scenarios. The additional capital provided by mortgage insurers in respect of insured loans increases the aggregate stock of capital available to support mortgage lending. Insurers who have a strong international presence and write multiple lines of insurance are well placed to absorb losses from mortgage exposure in one country. The capital provided by international mortgage insurers has the benefit of being diversified from the capital base of the domestic banking sector. Mortgage insurance, through increasing the resilience of the banking sector to property shocks, reduces the potential need for future taxpayer support to the banking sector. Mortgage insurance may help improve loan underwriting quality as the mortgage insurer will provide feedback to the banking sector in terms of changes to underwriting standards and practices. The mortgage insurer effectively acts as a second pair of eyes.
The recent UK Treasury help-to-buy guarantee scheme for high loan-to-value mortgages achieved good take-up by lenders due to the approval by the UK regulator of the capital benefits to lenders who participated in the scheme. Lenders who participated in the guarantee scheme can hold less capital in respect of the guaranteed loans due to the fact that additional capital is being held by the guarantee scheme in respect of the covered loans. In Italy, the regulator gives preferential capital treatment to loans above 80% loan-to-value, LTV, where the loan is covered by mortgage insurance.
We encourage the Central Bank to provide clear guidance to lenders on the reduction in the capital they are required to hold when a loan is insured by a strongly capitalised and highly rated mortgage insurer. We note that the EU capital requirements regulations, CRR Article 202, in respect of eligible providers of unfunded credit protection require an equivalent rating of A- or above.
The cost of mortgage insurance is comprised of three components: the expected losses; the cost of capital which the insurer holds in respect of the insured risk; and the administrative costs of providing the insurance services, such as loan audits and claims handling. The larger of these components are the expected losses and the cost of capital, with the administrative costs being the smallest component.
Where mortgage insurance is provided in a regulatory framework which allows for capital benefits to lenders, the economic benefits of reduced losses for the lender and lower cost of capital for the lender balance off against the cost of these components in the mortgage insurance premium. The net economic cost of providing mortgage insurance is the frictional administrative cost of providing the insurance services. However, there are also additional benefits to the lender in terms of increased resilience to withstand adverse economic scenarios and lower volatility in the lender’s profitability. These benefits may enable the lender to access funding and capital from the capital markets more easily and cheaply than they would have done so in the absence of mortgage insurance.
We believe that the cost of mortgage insurance would not be fully passed through to the consumer, but rather lenders would adjust their pricing of mortgage interest rates to allow for the economic benefits of mortgage insurance to the lender.
I will now outline the rules of the meeting in order to give everyone an opportunity to ask questions. The lead speakers of each group will have ten minutes and committee members and others and will have five minutes. The clerk and I will be keeping an eye on the clock. I will advise speakers when one minute remains on their speaking time to give them time to wrap up within their time slot. If members have further questions and time permits I will be happy to allow them to make a further contribution once everyone has had a fair opportunity to put his or her questions.
Deputies are asked to keep their questions short and to the point. I also remind them not to begin side conversations while someone else is speaking. It is both discourteous and distracting. If they wish to do so they may do so outside. I ask for their co-operation on this to help ensure the smooth running of the meeting. Is that agreed? Agreed.
I welcome all of our guests and thank them for sending in their opening statements and presentations in advance of the meeting to give us an opportunity to go through them. I can certainly see the benefits of mortgage insurance or a mortgage indemnity guarantee, whichever the witnesses prefer to call it. The key issue is the pricing and the cost which I would like to tease out in a moment.
Are each of the entities represented here regulated in Ireland? Arch said in its opening statement that it is. Is Genworth?
The companies seem to say different things about the cost. JLT seems to say the bank will pay a one-off premium in respect of the insurance policy. In the other examples I assume the borrower will pay a monthly premium to the insurance company. Is that how it works? Genworth might reply first.
Mr. Simon Crone:
It would be a lender-paid product which is how it works across most jurisdictions around the world today so the lender bears the cost of the insurance, normally in the form of a single upfront cost. The price depends on the terms and conditions of the product, the duration, the size of the cover, the depth as we call it. In a typical example on a €200,000 mortgage in Ireland a single upfront cost, a one-off payment from the bank would be somewhere in the order of €2,000. If that was transferred to the borrower in full as part of the interest rate that is charged on the mortgage it would end up being around €250 a year. The bank would obtain many potential benefits, in terms of reducing its capital and provisionings and therefore the full cost may not need to be passed on to the consumer. In the worst case it is €250 a year. It takes many assumptions into account.
Mr. Simon Crone:
It depends. They do several things, they can pass it on and that would result in the numbers I mentioned, the full cost of €250 a year which would be passed on as part of the interest rate to the borrower. They typically absorb a lot of it and get savings from the cost of capital and provisions which reduces the amount that needs to be passed on to any consumer.
Mr. Simon Crone:
We are all about transparency. There is no commission in this premium. In some countries, for example, Finland, it works differently and is passed on transparently to the borrower as a line item in the loan closing documentation. The borrower is very aware of it. Both models can work. We believe it is more straightforward for the lender to pick up the cost directly.
Mr. Stephen Rance:
It has been the case in certain markets that the premium would be passed on in full. The consumer would see it added to the loan and therefore it makes a difference of a few euro a month. We have not seen capital relief come into play in local markets. In the past it has been risk protection and the premium has been charged for that. When we see capital relief for lenders that changes the whole economics of the mortgage, with a lower cost for the lenders and that premium could be absorbed differently.
Several of the companies made the point that the banks may reduce their rates because there is less risk in respect of pricing the loans. Experience, however, tells us we cannot rely on that. We need to assume that the full costs of this insurance product will be passed on to the consumer. We have to assume that. The banks may well use the reduced risk to increase their profit margin on a variable rate loan. The key issue is pricing and cost because anyone taking out a mortgage in Ireland today will more than likely be on a variable rate of between 4% and 4.5%, which is quite high in international terms. Anything that increases the cost is an issue.
What then triggers a pay-out? That was not covered in any of the presentations.
Mr. Simon Crone:
I would like to add one more point on the previous question. In the UK, for example, where several lenders use mortgage insurance but some do not, the prices for the consumer end up being pretty much the same. That is an international benchmark.
There are several claim triggers. The first and most obvious one is after the repossession and sale of a property at a loss to a lender. In our experience, given Ireland’s unique circumstances and the problems getting court appearances and the delays in repossessions, which should always be a last resort because a loan modification should be put in place, mortgage insurance would fit in with the existing mortgage arrears resolution strategies. It would pay out at several other points along the process. Even potentially to be compliant with the capital requirements regulation there should be an option for it to pay out at 24 months after a loan has gone into arrears. There are three distinct times when it could pay out.
The most likely situation is that somebody loses his or her job or encounters financial difficulty, and the mortgage falls into arrears. Under what circumstances can the insurance be invoked to help that person?
Genworth mentions in its presentation that it has paid out in some cases where mortgages are restructured. We all understand that if the loan gets into trouble and the house is repossessed and there is a shortfall the bank can invoke the insurance. In day-to-day terms, however, if the mortgage gets into difficulty and arrears what kind of help is available through the insurance scheme for the borrower?
Mr. Simon Crone:
The protection is for the lender. It helps the borrower indirectly. It is not mortgage payment protection. In Ireland we have made several accelerated claim payments to lenders ahead of our contractual obligations which the lenders have been able to use to help modify the loan. We have made the claim payment to the lender who then chooses how to apply it in terms of any modification to the borrower along the lines of the mortgage arrears resolution strategy.
Mr. Angel Mas:
As of late, with full implementation of that strategy we have been formalising our payments to some of our protected banks by supporting them on split mortgage solutions. This means that whenever the bank applies a split mortgage solution to a borrower in arrears, we chip in a significant part of the protection, not having a full default and foreclosure, so that part of that money can be applied to that split mortgage resolution.
Mr. Simon Crone:
It is invisible, although there is a strong alignment of interests for us to ensure that sustainable borrowers stay in their homes, so that we do not have to pay a claim. In practice, we work very closely with banks to ensure that all solutions are availed of and to try to help borrowers stay in their homes. As the committee has seen from our documentation, we have a strong track record of introducing global best practices to help keep people in their homes.
To tease out how the proposed Central Bank rules would work - the rules are not finalised yet, so we cannot be certain what the final outcome will be - if it sticks with the current proposal of an 80% loan-to-value ratio, LTV, Mr. Crone is suggesting that, for example, somebody could actually borrow 90%, but 10% of that would then be insured through a product offered by one of the witnesses.
Mr. Simon Crone:
Yes, we believe that as a solution to the restrictions that are in place, a loan with mortgage insurance could be excluded from both the numerator and the denominator of the LTV caps that are being proposed. This creates an appropriate solution to ensure that first-time buyers are not excluded from the market.
I thank the witnesses for coming to this meeting and sharing their knowledge of what is a very interesting topic, given Ireland's current situation. Deputy McGrath has teased out the costs, which was my first question, so I will ask two other questions about the practice in other countries. How much uptake is there for this type of product in, say, other European countries? For those who do take up the product, how many times is it called upon? In the Irish context, we already have banks with buckets of insurance policies against risk, so this will be an extra layer of risk insurance for the bank against a borrower, who might not be as sure as we have been at the bank, which says much more about our banks' practices in the past than it does about borrowers at the moment. We are actually potentially proposing to penalise borrowers more than we have done in the past with hidden costs through the interest rate charges from banks already, because our current banks cannot borrow on the capital market. The reason this insurance is needed - and it is needed - is that our banks cannot borrow on the capital markets. It should never be the case that the borrower pays. I appreciate that it costs €2,000 for a €200,000 mortgage, but the lender should pay, as it is the lender that will benefit from this. The customer will still pay their mortgage at the interest rates that are set by the banks at the moment. Could the witnesses give me their thoughts on that?
Mr. Angel Mas:
One can consider several experiences internationally. In Europe, for instance, it was mentioned before that Italy has something called Fondiaria status since 1995, so through regulatory benefits practically all high LTV loans are protected at this point and benefit from that status. Finland always had mortgage insurance, where it was prevalent, but recently new regulation has been imposed. There is now a soft cap, which is what we would propose here, so that banks can give up to 80% LTV loans. In the case of Finland, it is actually 75%, but they can only go beyond that with additional guarantees, of which mortgage insurance is the most important. We always mention Canada because it is considered the most prudent and resilient market in the world. In Canada, mortgage insurance is compulsory, since the 1950s, for an LTV of over 80%.
Mr. Angel Mas:
A small technical point on Deputy Doherty's assessment that this is a problem of funding. Fundamentally the banks see it as a problem of risk and risk is associated with reserves and capital. Banks perceive that high LTV loans have specific risk characteristics. This is not due to the low quality of the loan, which must be of high quality, as we cannot do sub-prime high loan-to-value, no question about it. Even when a good quality loan originates from the high loan-to-value segment, if it goes on default the loss for the bank will be much bigger. In view of that, the banks must have bigger reserves and much more capital - sometimes six times as much capital. That is why the cost of high LTV loans is much greater. Such loans are directly associated with first-time buyers, which is why first-time buyers are the first to suffer when there is a solvency or capital problem in the bank. There is no credit access to them, so we are trying to propose a way of reconciling those two elements: prudent access to credit for first-time buyers and macro prudence and financial stability.
In the markets in which the witnesses' firms are currently operating, how much of a draw is there on the insurance policies that have been sold? For argument's sake, take the two examples of Finland and Canada. Is there a high draw on insurance policies in Canada, where it is compulsory? Is it different in Finland? Are the markets different?
Mr. Simon Crone:
There are two aspects. In Canada the uptake is lower for a couple of reasons. Canada has had quite a good crisis, in global terms, compared to many other countries. A high level of prudence is applied because the mortgage insurance is required and the mortgage insurers require very high quality originations only to those borrowers who can afford the mortgages because they are putting capital at risk. This means one avoids some of the losses that would occur if there were bad lending practices. The uptake has been very different in other countries. In Ireland we are proud of paying many claims because we have needed to and Ireland has had a very difficult economic period. In countries like Canada there is less uptake, because there have not been as many defaults.
Mr. Angel Mas:
For example, in Spain Genworth has paid in excess of €300 million in claims so far, so it depends on the situation of the country. Part of the reduction in the uptake, as Mr. Crone mentioned, has to do with the quality of originations. Our own books in this country, like-to-like, probably had a 30% better experience when protected than when not protected because of the discipline we imposed on those originations. However, in bad times, good books suffer.
Mr. Stephen Rance:
We have contemporary experience in the UK with the help-to-buy scheme that is under way. Prior to that, we brought in the new buyer scheme, with Government backing. While these are Government bank schemes, the cost is borne entirely by the lender. These are very fresh schemes - the new buyer scheme is only three years old - but the performance is outstanding at the moment. There have been no claims yet.
Mr. Michael Bennett:
On the prevalence and the take-up of mortgage insurance, many lenders are comfortable with the risk they have and may not always seek that cover. That gives rise to concentration of risk within, say, the domestic banking sector. That is why we advocate mortgage insurance as a good tool to mitigate that risk. In terms of encouraging take-up, the rules in respect of Basel II and III have changed and, as mentioned earlier, the capital a lender is required to hold in respect of a high LTV loan has increased through these changes.
Provided the lenders can get that benefit and the regulators make clear guidance available, which they can do under the EU capital requirements regulations framework, we will see greater take-up of mortgage insurance within Europe.
Mr. Michael Bennett:
When we review the risk on a loan, we look across a number of dimensions such as the affordability assessment on the borrower, the deposit the borrower brings to the property or the LTV ratio, the contractual features of the mortgage, and whether there is a variable rate or a fixed-rate period; all of these aspects feed into the risk of the product. When we insure loans we try to avoid layering of various risk components. It is difficult for borrowers to save a deposit and I think there is an appropriate level for certain borrowers where an LTV ratio is there. I would not necessarily put hard numbers on the appropriate level or the cap. We have to look at risk across a number of dimensions and at the layering of risk.
If I was the Governor of the Central Bank - the Governor is engaged on consultation process on putting a cap in place - and I asked Mr. Bennett what the cap should be, 100%, 95%, or 90%, would he say that he does not have a view on it?
Mr. Michael Bennett:
Our experience is where the borrower does not contribute a deposit to the property we see much a greater incidence of defaults, so I would start with less than 100%. Where exactly along the spectrum the figure would lie, and the quantity of lending that would be given out across that spectrum, depends on the specific risk attributes that apply. I would say less than 100% but I would not be more precise than that.
Mr. Angel Mas:
In terms of international experience, the Canadian regulator would cap it at 95%. Finnish regulation implemented this year caps it at 95% for first-time buyers and 90% for second-time buyers. We agree that there should always be a healthy minimum down-payment on the part of the borrower in order to have we would colloquially call "skin in the game". Certainly 20% or 25% would exclude those first-time buyers, not temporarily but permanently, because as they also have to pay for rental they would simply not be able to save a deposit of that size.
Mr. Joe Leddin:
I think somewhere in the 90% to 95% zone would be appropriate. It is down to the capacity and willingness of third-party insurers to take on the risk and transfer it from the State and the banks. For me, a key component is the income multiples and the capacity to repay. The insurance companies' willingness or unwillingness rests on that component.
That is fair enough. I have a number of other questions and would like to hear from all of the witnesses so perhaps we could keep the questions and answers brief. House caps are operational in a number of jurisdictions, for example in the Netherlands, where insurance can only be availed of if the house is valued at less than €250,000. In Canada, the cap is $1 million. Where do the witnesses settle on the issue of house caps and mortgage insurance?
Mr. Angel Mas:
We believe that policy actions should be targeted at first-time buyers. First-time buyers clearly do not need a house valued at €1 million. We believe that one of the limitations of the help-to-buy programme in the UK was that they set the cap too high at £600,000. That was totally unnecessary if one is targeting first-time buyers. We think that a rational cap might be different in Dublin as compared to other parts of Ireland, but it certainly should not be more than about €225,000 to €250,000. By doing that, the segment of the property market that is most subject to home price appreciation frenzy and speculation can be avoided. It is limited to the type of property that suits first-time buyers.
One of the big concerns about what the witnesses are arguing for is that it allows banks to issue high loan-to-value ratios, providing more credit to consumers who bid against each other where there is a lack of availability. A cap on the house prices that can be eligible could have the effect of quelling that fear. Mr. Mas mentioned the sum of €225,000, but he is probably not going to have many customers in Dublin for whom that figure would be sufficient. Is that a figure he believes is adequate?
Mr. Angel Mas:
We would probably have the right first-time buyers whom we would want to support, but our experience in the UK, where we work with multiple building societies, is that, yes, most of our exposure is outside of London and the south-east and that is probably not a bad thing in the case of the UK in the short term. The exposure to London and the south east in the help-to-buy programme in the UK is a small fraction of the total.
Mr. Stephen Rance:
We are talking about an increased stimulus through mortgage insurance. The problem we have seen in the past is that the regulator does not necessarily have the subtle tools needed to manage the intricacies of the housing market or lender decisions. When a market starts to heat up, lenders get more competitive and that stokes the market. By giving the regulator control of a national consortium-based mortgage insurance scheme, the regulator can then influence the insurers' decisions. If the insurers will not insure the loans, then the lenders will not be able to cause the market to overheat. That is the sort of experience we have seen in Canada, I believe, where the worst excesses of lending at the height of the market were controlled through the availability of insurance and through more subtle measures. We do not start to talk about basic LTV ratio caps or basic house price caps. We look more into the intricacies of what stimulates lending and overheats the market.
As providers of mortgage insurance who were operating during the property boom - I am aware the witnesses say this was also common practice before the property boom - how many customers would have availed of their products? The witnesses' organisations were in the market during the property boom and the reason they are not in the market any more is that the 100% loan portions they insured are not longer issued. These 100% loans defaulted despite the second pair of eyes scrutinising them. What is to say that, by increasing the loan-to-value ratios again, we are not going to see exactly the same type of practice in the future?
Mr. Angel Mas:
We did not cover all institutions, only those institutions that wanted to cover themselves. These were probably more prudent than average because it meant an additional cost to them, which made them less competitive in the market. My first response to the Deputy's question would be that universality of cover is very important. It produces a cost as it mutualises the risk but it also does not penalise the most prudent. Our books, as we mentioned before, perform significantly better than the average but if we did not provide a value in the worst meltdown scenario that can be imagined, then there would not be any value for insurance. I believe good books really suffer in bad times.
With apologies for cutting across Mr. Mas, the point I would like to get to is that banks - we are not aware which ones the witnesses provided with their services - may have lent to customers who subsequently lost their houses as a result of the companies coming in and saying they would insure a certain part of that mortgage. This allowed that bank to take more risk - Mr. Mas has described it as prudence - because it was not carrying all of the weight of the risk.
Everybody enters this type of scenario as a willing party but that person is without a house today because the bank loaned more money than the person had an ability to pay. The insurance allowed them to pass on some of the risk.
Mr. Angel Mas:
As an example of our experience in Ireland, a couple may have asked for a mortgage. They could be a policeman and a nurse but if one of them lost a job, would they have been overborrowing at a rate of 25% of debt to income? That is not necessarily true. Such people have mostly avoided losing their homes. We have modified 15,000 loans and such couples are still in their homes, in many cases through the use of a split mortgage, where they are repaying what is possible and there is a warehoused element of the mortgage going forward. We have chipped in part of the cost of that split mortgage.
What the witnesses are involved with seems to be voluntary. That is obviously more beneficial as the full amount is not being paid out such as if the house is repossessed. It seems to be a voluntary process of benefit to the company, the bank and the customer. It is not something written down as part of the rules.
Mr. Simon Crone:
It was not, as nobody expected the crisis to evolve as it did in Ireland. Going forward, it should align very closely with the mortgage arrears resolution strategy and claim payments should align with the framework that is right and starting to take effect and have an impact on the arrears position in Ireland. It needs to dovetail with the mortgage arrears resolution strategy.
Mr. Angel Mas:
I will not get into ideology but rather deal with practical matters. The State budget is limited and we know there are many areas, such as social housing, where the private sector would probably struggle more in participating than in this segment, where there is plenty of international capacity and experience. We are a for-profit company but we also serve a purpose for forbearance.
Mortgage insurance guarantees - also known as mortgage insurance schemes - are not something that just arrived after 2000; they were quite common in the housing market in the 1980s. I worked as a solicitor in conveyancing and I came across these schemes back in the day. The witnesses have indicated that the downturn in the late 1980s generated massive claims, repossessions and so forth, and insurers had never anticipated this level of claims activity, with many seeking to try to avoid payment of claims. The witnesses also indicated that lenders remain sceptical of the type of protection offered, as do many international regulators. There have been difficulties in the past with these types of insurance products. Have international protocols been put in place by insurers so that there is a commonality of standard. Are there reinsurance products that ensure ultimate security for the lender?
Mr. Michael Bennett:
The rules of Basel II and Basel III specify for unfunded credit protection, and mortgage insurance is a type of unfunded credit protection. There are specified rules in terms of certainty of payment, timeliness of payment and certainty of cover. There is specification of many criteria that insurance protection must satisfy if it provides capital relief benefit to lenders. We hope to design a product which meets the economic needs of lenders and which also satisfies the regulatory needs for what the regulator wishes to achieve. It provides capital benefit to the regulator. There has been much movement between the Basel II and the Basel III rules in order to bring greater specificity to the type of cover that can be provided.
There was an earlier question relating to the crystallisation of loss. The witnesses mentioned that insurance policies could encourage lenders to move to a loss crystallisation as soon as possible to lower arrears, interest and, ultimately, the claim. They explained to my colleague that they would work through the various different processes and so forth. There are three individual providers but I want to know if there is one set of rules and regulations where I as the ultimate consumer will know how I will be treated in the event of a default or a claim.
Mr. Stephen Rance:
The easiest way to explain is to describe a recent process we have been through with the schemes put together in the UK, backed by the UK Government. In those instances, the process was very much policy-driven. All the lenders must assign their procedures to the insurance policy and adhere to the policy as they were before the insurance was in place. That could be underwriting or methods of dealing with arrears and recovery. We touched on another important issue earlier, the 24-month settlement from a cash flow perspective from lenders. In that instance, the process is driven by the Basel processes and capital relief. We developed policy wording that ensured the insurer would pay out after 24 months of default to the lender, irrespective of whether the loss had been crystalised. That meant there was not a rush to get to a crystallisation.
In the opinion of witnesses, the regulation is adequate. For example, we have a code of conduct on mortgage arrears that protects the consumer. I want to establish whether what the companies are offering to the banking sector will not undermine that in any way and there will be a commonality of approach.
Mr. Angel Mas:
It is a very good point. Not only will it not undermine the process, it will help to enforce it. We participated closely with the regulator in the development of the mortgage arrears resolution process, MARP, and in our opinion, this was good. When the crisis ebbs, who will enforce those very strict and demanding rules? Although I am only speculating, the Central Bank may lose focus. The providers of mortgage insurance will remain very focused on the application of those MARP rules, which align perfectly with what they do.
I am afraid of running out of time so I will put two questions together. From an individual borrower's perspective, it seems the insurance company would make decisions in respect of the borrower and not the bank. That is in respect of the extent to which people are regarded as a risk.
My second question relates to the help-to-buy scheme in the UK. There has been a very mixed reaction to that scheme, as the witnesses probably know. On the positive side, it has been credited with bringing more units onto the market but, on the negative side, it has been charged with pushing prices up and squeezing out other buyers. Do the witnesses have any comments to make on that scheme? While we are all very aware of the difficulties facing first-time buyers, one of the concerns is that in a market in which supply is very tight, products like these will simply inject more demand into the market which cannot be satisfied.
Mr. Simon Crone:
The underwriting authority would be under a delegated model so we would agree what terms and conditions and lending policy the lenders should be using. That is why we apply our level of prudence, to make sure they are not doing anything that even approaches sub-prime lending. The decision will be made by the lender and then we sit behind the lender. We delegate the decision on whether to lend within a prescribed set of rules and the lenders carry on working as they would do today.
On the Senator's second question, the scheme has definitely helped the supply side. We have seen a 25% increase in house building activity in the UK on the back of the help-to-buy scheme. The data shows that 95% of the scheme operates outside of London. It is fairly well accepted now, after the initial question as to whether it was driving an increase in house prices, that it is not doing so because most of the activity is outside of the area where the bubble is forming, namely, London and the south east. It has been targeted by limiting the size of houses and by making sure that it is focused on first-time buyers outside the real hot spots in the country.
Mr. Michael Bennett:
We would be happy to enter into negotiations with lenders. While we have not seen the format and structure that mortgage insurance would take and the regulatory framework pertaining to it, we would be happy to have negotiations with the lenders. If their risk profile, in terms of their underwriting standards, adheres to what we deem to be appropriate, we would happy to insure them.
Mr. Stephen Rance:
On that last point, our recommendation would be to bring together a consortium of insurers rather than dealing with individual insurers. Such a consortium of appropriately rated insurers would allow us to address more of the market and would give the large banks a wider risk spread. They would not have all of their risk with one insurer but would be able to spread their counter party risk. That is critical.
Mr. Angel Mas:
Personally, on the basis of our international experience, I would disagree with that approach. Markets are better served by applying what has worked in the past and what international markets identify and recognise. Successful experiences in other parts of the world show that this works best when there are a number of specialists providing the service. They must be specialists and really know what they are doing. Generalists are not appropriate. General insurance companies do not provide these products because they require a very specific set of skills. The risk is then spread, as with normal insurance, through re-insurance. We have a panel of eight re-insurers in Europe and 11 in Australia. In Australia, the re-insurers provide €60 billion of capacity per year. There is significant re-insurance capacity available in the market.
I welcome the witnesses to this meeting. I must say I am somewhat sceptical about all of this. Our mortgage market is picking itself up off the floor and all of a sudden we have various companies coming in and dressing this up as something to help individual mortgage holders. It is not that long ago since we were in this room dealing with people who had been mis-sold mortgage protection insurance. The banks and their agents had to be forced, in a David versus Goliath-like fashion, to repay mortgage holders. There was a cohort of people in financial difficulty who, on checking the small print, found that they did not qualify. I am sorry if I am somewhat sceptical about the intent here. I am dubious about the claim that this is something that is good for the mortgage holder. Certainly, risk sharing is something that this committee is interested in and in that regard, there is a role for insurance companies. However, I do not believe that this will ultimately be a lender-paid product. In other words, I do not believe that the banks will pay the insurance companies and the consumer or mortgage holder will have a safety net available should he or she run into financial difficulties. That is just not the way it works. Banks are in business to make a profit, as are the insurance companies. While I am all for profit, the notion that this is a lender-paid product does not stack up.
I ask the witnesses to give their views on the lending institutions only having recourse to 80% of mortgages taken out by first-time buyers, with the 20% non-recourse element being the subject of a separate financial insurance contract between insurance companies and the banks. If, for example, a first-time buyer runs into difficulty with a mortgage for a family home, he or she is on the hook for 80% and the bank cannot pursue the mortgage holder for 100% of the liability. The mortgage insurance requirement would be on the non-recourse element based on a strict contractual arrangement between the lenders and the insurance providers. The historical experience of mortgage insurance here is not a pretty picture. There are thousands of people in this country who would have a very jaundiced view of what they are hearing this morning. The insurers are being portrayed here as knights in shining armour coming to the rescue of an emerging market that is only just picking itself up off the floor and offering something that is good for the mortgage holder, the insurance companies and the banks. However, it would only be good for mortgage holders if they were not on the hook for 100% of their liability, on the back of an arrangement between the banks and the insurance companies.
Mr. Michael Bennett:
The proposal made by the Deputy is that the portion of the loan above 80% would be unsecured lending and would be non-recourse and he asks whether there would be an appetite among insurers to insure such a loan. The first step would be to fundamentally change the way mortgages and credit are distributed in Ireland and to tier mortgages into two components, a secured and an unsecured component. That would need to be evaluated in detail to determine its impact. The second aspect to this is the appetite of insurers to lend in those circumstances. We would term that a "second lien" although it is not even that; it is an unsecured second lien which sits over the first security that the bank has towards the borrower. It is not the type of risk which we would have an appetite for insuring at the moment
Mr. Simon Crone:
To answer the Deputy's first point, we believe it is unfair that only people who have wealthy parents or some way of coming up with a 20% deposit would be able to access home ownership. We believe that mortgage insurance would facilitate a more open market and assist people who have good jobs and strong affordability but who may not be able to save up the large deposit required. We believe it would create a fairer market for all first-time buyers. I agree with the Deputy that it absolutely should be a lender-paid product.
Mortgage indemnity insurance is not the same as mortgage payment protection insurance. The latter clearly had a distribution issue. As underwriters, we could not comment on the distribution practices of the banks around that and this committee has dealt with that issue previously.
On the final point, we believe it would be appropriate for the insurers to waive their subrogation rights against borrowers. As with any secured lending environment, the lender would always need to have some form of recourse or recovery rights on the borrowers but we would be willing to waive our subrogation rights.
If we paid a €10,000 claim, potentially the lender would forgive some of the claim we made, if the borrower was in negative equity. The bank would still clearly carry its right of recourse against borrowers but the insurers would not look to subrogate their rights, and the part of the claim we have paid may not need to be recovered from the borrower.
Mr. Stephen Rance:
We, JLT Insurance Brokers, are insurance brokers and deal with hundreds of insurance companies. I am forever taking structures, transactions, ideas and notion to those insurers to try to make them work. What is critical is that every party involved in the mortgage has, as we have said in the past, skin in the game. We insure the behaviour of those parties as appropriate and the risk is commensurate. If that were not the case, the risk could be so high to one party that the premium goes out the window and it would not be a structurable transaction.
I thank the visitors for coming along at our request and helping the committee in determining how we get round this dilemma to ensure that we do not have a housing bubble again, given the damage done the last time. Is there a danger that the products we have heard described this morning become sub-prime lending? That would be my first question.
Mr. Angel Mas:
Our experience is that it should be the opposite of sub-prime lending. Our belief is that the combination of low-quality underwriting on high loan-to-value mortgages is toxic and there is an experience that has been horribly painful. What mortgage insurers do precisely is to isolate the second half of the risk in a mortgage, that is, the severity - the loss that occurs when one lends a large proportion of the property value - but also impose high quality on the first factor of risk, that is, the probability of default, which refers to the quality of underwriting. There is a perfect alignment of interest from the insurers that assume that the first loss in every mortgage is minimised and the quality of underwriting is maximum quality.
I would insist that low quality underwriting on high loan-to-value mortgages is toxic. We need to ensure high quality underwriting and high quality lending, while still minimising the risk associated only with high loan-to-value mortgages, which is the severity, not quality, of underwriting.
Mr. Stephen Rance:
Regulatory control comes into play here as well. If we take an example that we had with the NewBuy scheme in the United Kingdom, we currently see very good lending practices. Lenders are risk averse and we look to ensure those practices in the policy underwriting at that point in time. Actually, one is controlling and containing that aspect.
As the market improves, of course the danger is that lenders look to move outside those lending criteria into looser areas and it is important that both the insurer, and, perhaps, the regulatory control that sits around the scheme, enshrines good practice lending in the difficult times for when things get better.
Mr. Michael Bennett:
I would add, as a diversified insurer that writes multiple lines of business, we would seek to deploy capital for risks that we are comfortable with. I suppose mortgage insurance is a mechanism which transmits information back to lenders in terms of the standards and changes in standards.
In that context, I would see that the information flow-back to lenders would help to maintain good underwriting standards.
Mr. Simon Crone:
Only this week, on Tuesday, I spoke to four of the lending institutions in Ireland and they are keenly interested in the scheme. Some have previously used the product in the past and some have been our clients historically, so they are keenly interested and have shown an appetite to make use of the product.
Mr. Michael Bennett:
We have spoken to most of the lenders operating in Ireland over the last number of years. We have not had detailed discussions in respect of coverage options. The framework by which mortgage insurance may come into place, and how it interacts with the regulatory framework, has not yet been decided. We have had meetings and they are aware of us, but we have not had any detailed conversations in respect of coverage.
The other problem - if I may include it, Chairman - is that in addition to banks going broke and costing us €64 billion, we have an unfortunate tradition of insurance companies doing exactly the same. These include ICI, PMPA, Quinn and now Setanta. Is there a danger in this - I am not referring to those present here - that an insurance industry that has not been well regulated could turn out to be a burden on the taxpayer? While not as bad as the banks, it is still not good news that we seem to end up, through levies, bailing out people who do not do risk very well. What has been the custom, practice and tradition in the witnesses' own sectors?
Mr. Simon Crone:
The insurers operate under a prudential regulatory regime these days, which is demanding. For example, in the UK we are required to hold capital well in excess of a one in 200-year event. With the onset of Solvency 2, which will be the EU-wide insurance regulation, coming into force, it will also further standardise a lot of the prudential regulation and financial strength of the insurers, than in the past. Yes, there have been insurers who have gone into insolvency in the past but we hope they would become fewer, particularly with the strong regulation under which we have to operate.
Mr. Angel Mas:
I will add to that, if I may. That is why this is not a game for general insurers. Mortgage insurers need to be specialised entities. They have a specific regime under the PRA whereby, for instance, we will not invest in any mortgage-related asset. We hold massive liquidity compared to our whole asset base. We need to match our assets and liabilities because our liabilities are long-term in nature. We cannot have any substantial debt because we would not be able to access the markets when the crisis hits. It is important to learn from the past. In the past, some general insurers may have tried this particular segment and they were unsuccessful. International experience in the best countries demonstrates that the specialists do better.
Mr. Stephen Rance:
As brokers we advise all sorts of organisations - banks, governments - on how to manage all sorts of risks, including mortgage risk. In addressing that point in particular, we recommend that one spreads one's counter-party risk as much as possible. One therefore looks to work with a range of organisations and one seeks to ensure that those are diversified organisations both geographically and through lines of risk. That is the best way to manage risk.
Mr. Michael Bennett:
If I may add to that, I would say that mortgage insurance is best suited to specialist insurers who have the knowledge and expertise to assess the risk. The exposure stays open for many years and stacks up exposures. Contrary to car insurance where one knows that one's exposure is over at the end of the policy year, the mortgage exposure stacks up over a number of years so it requires a specialised skills set.
Diversified insurers that operate internationally on a multi-line, can manage diversification within their insurance risk portfolio better than domestically focused insurers who are operating in a smaller number of lines.
One of the speakers mentioned the UK regulation, but I am sure all the visitors appreciate the concern that we in Ireland will have to get better at regulating insurance, given the problems we have had. The last one we discussed in the Seanad was Setanta which we thought was a Maltese company. There is still a possibility that there will be yet another levy here. Unfortunately for public policy making, that is a difficulty the insurance industry faces.
How much would it cost a mortgage holder to take some of the products on offer this morning?
Mr. Simon Crone:
We have run some indicative numbers as to what it might cost, using our experience. For a €200,000 loan that was lent up to 90%, where the borrower puts in 10%, we believe that the single up-front premium should be in the order of - and it will depend on the terms and conditions of the product - €2,000 as a single, up-front premium paid by the lender to the insurer. If the lender passes on all that cost - because they will spread it over the economic life of the mortgage - it therefore equates to around €250 per year, in the worst case scenario should all the cost be passed on to the borrower in the interest rate that is charged for the mortgage. They may reduce some of that because they would benefit from the risk transfer from their balance sheet to ours.
I have a final question on uncertainty about insurance. The JLT document mentions FBD which had a stock exchange warning and a massive collapse of its share price in the last number of weeks. Genworth had similar problems on 7 November. It was reported that a credit rating firm cut the company to junk on concerns about its long-term care insurance business, but it included this one. That is a problem I still have with it. In the literature brought to us this morning, there are two companies about which I would feel queasy from the public policy point of view - FBD and Genworth - because somebody somewhere is called upon to bail them out. If they were businesses that were not being bailed out, that is fine. Many businesses do go bankrupt but the financial sector specialises in beating a path to Government Buildings and we have to answer under the Constitution for how that money is spent. It is unusual for me, coming before the committee, to see warning lights flashing about some of the companies that are mentioned in our documentation.
Mr. Angel Mas:
Our regulatory regimes in every country demand that every underwriting entity is subject to specific regulations, specific capital, and needs to be stand-alone. For instance, our underwriting entities in Canada today have a single A plus rating. Our underwriting entities in Australia have a single A plus rating. As the Senator knows, the rating is related to the holding company and the debt service calculation.
That is why we believe the correct regime for Ireland would not be so much based on ratings but subject to Central Bank scrutiny and approval on the basis of who is the underwriting entity, what capital it has, what claims payment ability it has. In our case in Europe, we do not have debt. Any rating is associated with debt payment capabilities is technically from a rating perspective correct but wrong from the standpoint of assessing the certainty of payment for our insurance.
On 6 November, Genworth’s share price plunged 38% and Standard & Poor’s downgraded the rating from BB+ to BBB- due to concerns with earnings volatility and overall risk position. Bailing out insurance companies is second in unpopularity only to doing the same for banks.
The evidence from other countries such as Denmark and Canada supports the 20% mortgage deposit rule. Will the delegation explain in more detail why it believes the risk of reducing this from 20% to 10% can be insured for the amounts described but not for 0%?
Mr. Simon Crone:
We would advocate that there should always be some borrower deposit. It should be driven by a borrower’s ability and willingness to pay. There should always be strong calculations about affordability and prudency. Willingness to pay is driven by what we say colloquially of having some skin in the game. We always believe a borrower should have some form of down payment for a mortgage loan and it should not go beyond a 95% limit. There should always be at least 5% that the borrower is investing in the property purchase.
Mr. Stephen Rance:
Senator Barrett spoke about deeper protection within the loan. If the insurer covers 20%, 40% or the entire loan, there is an economic equation that relates to the capital relief. As I understand it, the deeper the cover, the better the capital relief. Consequently, if that capital relief is better, then there may be more ability from the lender to pay a premium commensurate with that sort of risk. It probably does not wholeheartedly answer the Senator’s question but it shows there is some mechanism to make something like that work.
I thank the delegation for a very informative meeting. I am one of those who believes lending without equity is reckless. Having 5% skin in the game is very low. We are talking about prices being elevated but I am not sure that is the way we want to go.
Who represents the person who pays the premium, namely the customer? Is there a representative body there? Every time I pay for something, I expect that I can represent myself and negotiate on it. If an insurer decides to pay out on a split mortgage, who deals with the customer? Does the insurance company come back to re-insure?
Is the maximum payment going to be €20,000? Does that change? The banks benefit from having this insurance in place. There has been sharp practice in banking and insurance in the past. People do not rightfully trust this area and trust in it needs to be won back. Should there not be full transparency? I like the idea of having separate billing for this mortgage insurance product. I would also like to see a separate assessment showing the banks’ benefit for this being in place. Essentially, a positive and a negative will be written down on the same statement.
What level of due diligence do the insurance companies seek to ensure the value of the mortgage is correct? What is done to ensure someone is not giving a false value? That practice was shocking here. It is not the insurance companies’ fault that people put on suits, calling themselves auctioneers and gave prices for property for which people could not pay ultimately. What is in place to ensure this does not re-occur?
What is the view on regional caps? There is a different property dynamic in Dublin than there is in Cork, our second city. Property values in Cork are still under 50% of what they were in the boom. Rents a few years ago would have been €1,000 a month but are only just coming back in at €900. Cork is not even at the races, so to speak. With these two parallel markets, is a regional cap required?
We need to get first-time buyers moving. For example, when combine harvesters are sold, up to six transactions could be involved. The little guy has to move on for the next guy to move on.
Is there the expertise and, more importantly, the culture in the banks to work with insurers? It is culture that counts. If someone comes into this with the wrong attitude, we will be screwed again. Would the insurers’ attitude to a State-owned bank be different?
Would these insurers take into account details such as age and health when considering mortgage insurance or is it a flat basis?
I have about ten questions in all for the delegates and they might do their best to respond to them.
Mr. Michael Bennett:
Okay. Mortgage insurance would be a contractual relationship between the lender and the insurer and the loan agreement is a contractual relationship between the lender and the borrower. To the extent that there are disclosures of information in respect of costs and illustrations one might see in other insurance products, that would be an issue for the regulator. I do not think we as an insurer who is now a party to the agreement could dictate it.
In respect of due diligence, most insurers operate under a delegated underwriting authority but perform periodic evaluations and loan file audits to assess underwriting criteria, including the accuracy of appraisal values. My experience is that for high LTV lending, a full appraisal whereby an appraiser visits the property, rather than a drive by appraisal or a view of comparable properties on a website, would be the most appropriate. We would be happy to provide coverage to State banks. In terms of the pricing and whether it varies by loan attributes, it does not vary by health and that is not a criterion this is considered by even the lenders. They consider the sustainability of income and affordability. In terms of age, the only caveat I would add is that the borrower must be have sufficient income for the term of the mortgage. Therefore, there is usually is a limitation on lending into retirement but there is not a differentiation between someone who is aged 35 and someone who is aged 40, apart from their being able to sustain the mortgage for its term.
Mr. Angel Mas:
I will respond to Deputy Barry's point on first-time buyers and the impact a cap would have and my colleagues can respond to some of the other points he raised. There will be a little fewer than 10,000 first-time buyer mortgages in Ireland this year, which will be high loan to value which is typical for first-time buyers. At the peak of the market there were more or less 37,000. If the normal level could be half the number at the peak, and I am speculating on this, let us say it would be 20,000 mortgages, that would mean that if it is 50% in terms of first-time buyers, it would be 40,000 total mortgages. If a cap of 15% is imposed, 14,000 families would be excluded from home ownership because they would not have the high loan to value mortgage they require. Even if applied to today's levels, that would mean that 6,000 of the mortgages that were originated this year would have been part of the quota and 4,000 would have been excluded and this is at a time when we have an all time low. Clearly, there is a need for a solution and we think mortgage insurance is a key part of that.
Mr. Simon Crone:
To respond to Deputy Barry's second question, he is correct that €20,000 would be maximum claim amount in the example he gave and his understanding on that is correct. We are supportive of transparency. There is nothing to hide in what we are trying to promote. For example, in Finland the cost of the mortgage insurance is laid out and the borrower sees it transparently and it can also be capitalised into the loan and can get spread over a cost rather the borrower having to come up with, say, €2,000 in the example I mentioned. We would support such transparency. As Mr. Bennett mentioned, we do due diligence up front and then we do ongoing due diligence to make sure that the quality of underwriting prudencies continued to be applied and that the valuation standards are high.
On regional caps, we would support something like that. The house prices required for first time buyers in Dublin with the commensurate affordability and prudency that is applied is different from perhaps other parts of the country and so a different level may be suitable for different parts of the country. We agree that we would work with both State and privately owned organisations and we would not treat them any differently. They would need to have the right capabilities to do prudent levels of underwriting and we believe that exists today in Ireland. Those are answers to a few of the Deputy's questions.
Mr. Stephen Rance:
I will not try either to answer all ten of the Deputy's questions in one go but I have an overview of this. In the proposals we put forward we recommended that Ireland have a national, standardised MI scheme backed by a consortium of insurers. That scheme would be under the oversight of the regulator. Therefore, we would hope that the regulator would examine some of the areas the Deputy raised, which include transparency, consumer representation, elements of capital relief and State bank versus commercial bank culture. We see the regulatory oversight as critical for managing something through the good times and the not so good times.
We have the idea when we are in here that we are coming at this from the side of the mortgagee, the person who holds the mortgage, but they do not have that much to do with us. They may be beneficial but this is about the Government wanting stability in the market and we want to spread that risk and we do so between insurance operators and the banks and it just so happens that the person who is taking out the mortgage has to pay for that because that is the price of stability. Where this benefits the mortgagee is in terms of the cap, which would seem to have quite a dramatic effect on the market because it will allow who can come into this. The 15% that was mentioned is part of an EU measure.
What the delegates said about the cap was interesting and we might return to that when we discuss this issue ourselves. The discussion this morning has been very interesting for us, some of it has been quite complex but we will tease it out when we have our own discussion on it. I thank the delegates for making their time available to us at short notice. The discussion will help us as we want to make our own submission on this. We had a request from the Minister for Finance that we as the finance committee put together a small report on this. We were not asked to submit it to the Central Bank but we decided that the most practical means is to submit it for the beginning of December. The Governor appeared before the committee yesterday and he expressed his own views on it and no doubt he will express further views on it. I thank the delegates again for making their time available to us and the discussion has been very useful. We will suspend the sitting and resume at 2 p.m. Is that agreed? Agreed.
This is the second session of the consideration of mortgage insurance in an Irish context. We have invited a number of witnesses to discuss issues regarding mortgage insurance. The format of the meeting will be a round table discussion. I welcome the witnesses, who will make their opening statements in the following order: Mr. Brendan Burgess, from askaboutmoney.com; Mr. Paul Joyce, from the Free Legal Advice Service, FLAC; Mr. Karl Dieter, from Irish Mortgage Brokers; and Mr. Ross Maguire, from New Beginning. When all of the witnesses have made their opening statements, a question-and-answer session with the members will then ensue. Given the time constraints involved and to ensure we have a constructive discussion, I ask that all opening statements be kept to approximately five minutes. Witnesses have already been advised by the committee secretariat that I will stop them if they go excessively over that time limit. I remind members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off because they interfere with the broadcasting equipment.
I advise witnesses that by virtue of section (17)(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to that effect. Where possible you should not criticise or make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable. Finally, members are reminded of the longstanding rule of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. I invite Mr. Burgess to begin.
Mr. Brendan Burgess:
I thank the Chair. The key point I want to make is that the main beneficiary of restrictions on reckless borrowing and lending will be the borrowers themselves. The people who suffer most when they borrow too much are borrowers. The banks can be insured and bailed out but the borrowers are the major losers. It is a decision of the Central Bank but as a society we need to set a level for prudent borrowing. Whether the LTV is 80% or 90%, we should set it and not exceed it. If we think that 80% is the correct level for prudent lending, we should not then allow reckless borrowing by way of mortgage indemnity insurance. That is very important.
If we think that 80% is too low, and it may well be, we should consider having an appropriate LTV, which might be 90%. We should not use mortgage indemnity insurance to get around prudent borrowing and lending. I do not think mortgage indemnity insurance is a very good idea. There was a very good discussion today, during which other witnesses made presentations. One point that is missed is that the insurance is very expensive and is paid by the borrower. It may be paid directly in the form of money seen in a mortgage statement or paid in some other way through interest rates, but borrowers will end up footing the bill for mortgage insurance. There are not many benefits for the borrower. If the mortgage defaults, the lender may well receive a lump of money from the insurance company, but the borrower is still on the hook for it, which is a very important point.
An example was given today of a house worth €200,000 with a LTV of 90% where the extra 10% was insured for a premium of €2,000. It is important to realise only 10%, or €20,000, of the mortgage is being insured for a premium of €10,000. It is not as if the whole mortgage or the bank's loss will be repaid if the borrower defaults. It is a very limited loss. I was very surprised to hear Genworth Financial say today that it paid out 15,000 claims and a total of €70 million. That sounds like a lot of money and I was surprised by the figure. In fact, it is €7,000 per claim. It will not make a large dent if there is another major problem.
The problem we have is how first time buyers can enter the housing market. They cannot come up with a deposit of 20%. My suggestion is to allow them to access their pension funds for the deposit. At the current time when somebody retires at the age of 65 years, he or she can access 25% of his or her pension fund tax free. I suggest we allow people to access it early, when they need it. That would mean people would be able to save a 20% deposit and there would be lower LTVs, interest rates and overall payments, which would be good for everybody. It would not be good for the insurance companies because they would not get their premiums, but it would be very good for borrowers and the economy.
Whatever changes we make should be introduced gradually. Deputy Pearse Doherty pointed out yesterday that we cannot introduce an 80% LTV on 1 January if mortgage insurance is not in place. If the Central Bank decides to bring in 80% LTV, it should be phased in over a period of time. Any changes should be phased in rather than introduced on 1 January because there will be unintended consequences. I thank the committee.
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".
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.
Mr. Ross Maguire:
I thank the committee for the invitation to attend this meeting. I am not sure I have much to add apropos of the previous speakers. I believe what the Central Bank is doing is important because at this time, long before any credit bubble arises, it is seeking to, and properly so, ensure that we do not, if possible, repeat the mistakes of the past. The Central Bank's function is to, in so far as is possible, maintain price stability. While inflation rates are currently low the real cost of living is inflating by reason, primarily, of increased property prices, be that in the rental or purchase markets. The Central Bank has a duty to ensure that as far as is possible we do not repeat the mistakes of the past. The question then is how does it do this. One mechanism is to require a deposit. It is in that context that the discussion around the mortgage insurance schemes arises. In my view, the requirement in terms of that deposit will be an important decision made by the Central Bank. It is designed not to punish first time buyers, even though it will have an affect on them, rather it is fundamentally to avoid banks becoming involved in what Mr. Burgess described as reckless lending or in improvident lending. The idea that the banks will not do that again is entirely misplaced. The banks will do that again once they get an opportunity to do so. Unless there is regulation against this, eventually time will pass and we will all forget what happened in 2007-2008, property prices will continue to increase, developers will recommence developing, credit will return to the market and, as prices increase, there will be a feeling of nothing can go wrong this time and we return to a credit bubble. This will happen unless steps are taken to ensure it does not happen.
It is interesting that while in Ireland when it comes to housing we live very much of the law of the jungle, in other countries, the state is involved in the property market. Here the only involvement of the State in the property market is in terms of social housing provision. In terms of the mortgage market for buyers with a rental market this is very much an unregulated environment. Regulation needs to be introduced in that area. In the 1970s when my parents were buying a house banks did not provide mortgages for first time buyers. These mortgages were provided by building societies or mutuals which were effectively not-for-profit organisations. The current providers of finance for the purchase of properties are profit driven organisations who make their profits from lending. It must be recognised, even at this early stage, that unless the market is regulated and unless credit is restricted we will inevitably fall back into a credit driven bubble. It is this that the Central Bank is seeking to guard against. The question that arises is what affect would the mortgage insurance schemes have on that regulation. My concern is that they are an attempt to avoid regulation. The pretence is that if they are put in place there will be no need for a 15% or 20% deposit. Eventually what will happen is that the deposit required will decrease and be replaced with insurance, which is okay for the banks, but will result in more lending into the market thus driving prices up. The argument against this - this was raised yesterday at this committee - is that it creates an inequality between those who can borrow and therefore have homeownership and those who cannot because they cannot get together the 20% deposit. The Governor made the point that credit does not result in greater equality. He cited the example of the United States where credit has resulted in deeper inequality. The Governor is correct that access to credit does not result in greater equality.
In all of that context, I believe the mortgage insurance schemes, while may be of some benefit, cannot be used to set at nought or undo the proper regulation that the Central Bank is seeking to put in place to limit the amount of credit into the area of homeownership, which is not good for the banks because they want to do that because that is where they will make profit, but it is good for society. At the same time, that will not solve all of our problems. We need also to look at other ways in which people can have sustainable long term stable housing. That, I respectfully submit, involves the state. The cost for a family with three children living in Dublin today renting or meeting mortgage payments on a three bed semi-detached house at the bottom rather than top end of the market is, at a minimum, €1,500 per month. If that is the case, then applying the Insolvency Service of Ireland reasonable living standard, that family would require a gross income of in excess of €70,000 per annum. This is an indication that the cost of living, when rent-mortgage costs in Ireland today are factored in, is a problem. As pointed out by Mr. Deeter, supply will be important in addressing that.
I would be concerned that a scheme like this would create a gap in the hedge to allow banks avoid regulation, which is important, resulting in five years' time in crazy lending happening again.
Dr. Ronan Lyons:
I apologise for being late.
I also apologise if I duplicate some of the points already made. I will keep it brief.
I hope most of us agree on what high level housing policy should be, which is that families should have access to affordable and abundant good-quality homes, and, if I can cheekily say, everything else is just detail. Obviously getting the details right matters. The State should be neutral between private profit-making, private co-operatives and social. It should also be neutral between owning and renting. These are not for the State to decide. We need to think of three groups, namely, private owners, private renters and social renters. I will return to this point because it is where the mortgage insurance scheme is targeted.
Affordability is about linking incomes to prices or rents and the cost of building. This can be thought of as a competitiveness argument The State tries to attract companies such as Google. The bulk of the cost base of such a company is wages, and the bulk of wage demands is to do with housing. In Trinity, students come from abroad and state they cannot find somewhere to live or it is too expensive. This affects competitiveness. The simplest maths is that we have a growing population but not a growing housing stock. It is a human right to have shelter. We can already see in the rental market that we have greater sprawl because we have reached the limit of where rents can go, and now a greater number of buses come from Cavan, Laois and Wexford on a daily basis bringing students to Dublin. The reasons for this sprawl may be for another committee, but it is not a sustainable long-term policy.
I will now discuss the housing market specifically in terms of the mortgage market. There are two sets of factors. The first of these comprises incomes, supply and demographics, and these affect prices and rents. Another set of factors affects the relationship between the two, which comes down to expectations and credit. There is much more detail in the housing market, but it comes down to these issues.
Mr. Maguire mentioned credit rationing. The effect of this is to try to keep the link between house prices and incomes, which should have a stable relationship. Credit rationing also aims to keep prices in line with rents. The side effect of credit rationing is to prevent the cost of building a home from getting out of control. In a sense we are too late on this, because it is what happened in the decade to 2007 and 2008, when the cost of building a home got way out of line with peoples' incomes and, because the price was going up, nobody really cared that much about the cost. There was free profit because credit was so easy.
The supply of credit should be rationed and the supply of housing is key. The effect of new supply is to keep prices and rents down; sometimes it is tough think in these terms given what we know and what happened over the past 15 years. One can say there was much new supply between 2001 and 2007, but neither income nor supply had an impact on prices in these years. The only thing that drove up prices was credit. We are now seeing the impact on prices and rents of all of the excess building in terms of keeping prices and rents low.
There was very little building in the greater Dublin area on a per capitabasis, even during the bubble. My concern is the new regulations have caked in the high cost base, which means that new housing is anti-poor in that those on low average incomes cannot afford to buy a minimum spec home in the greater Dublin area because of local authority regulations. Ironically, the new regulations mean greater profits per unit in euro terms for those who do get to build. The problem is most do not get to build because the numbers do not stack up.
How does all this relate to mortgage insurance? The direct effect of mortgage insurance will be to increase prices relative to rents and incomes. This is not in debate. If one gives more people more credit the first and most important thing to happen will be that prices will increase relative to rent and income. Generally speaking this is a bad thing unless it is in some way sustainable. An insurance scheme may remove some of the risk to the banks, but it breaks the link between peoples' incomes and the cost of people's homes. This is my concern. We can go into it in more detail during the discussion.
Generally speaking, I hope committee members have taken from what I have said that as a general rule credit rationing is good and what the Central Bank is trying to do is good. Clearly there are transitional issues and cost issues with regard to building a home. The introduction of mortgage insurance would undo this work and would leave us open to the prospect of another bubble. The one asterisk to this is if we have next to no social housing strategy then mortgage insurance might fulfil a role. If one thinks about the distribution of people and, for simplicity, renting as an age factor, there will be a dividing line between people at family stage in the private and social sectors and the minimum deposit will determine the boundary. No social housing would mean the lowest minimum deposit possible because the private sector would have to provide for everyone and therefore everyone would require access to credit. The existence of a social housing strategy would mean such a low minimum deposit would not be necessary and the deposit could be much higher and safer. The concern is the mortgage insurance scheme is effectively a substitute for a full social housing scheme.
I must go to the Seanad soon so I will probably have to leave before the witnesses conclude their replies. I was not expecting to hear what I am hearing on this issue. I thought this was a no-brainer, which is the impression given in the media. The thought occurred to me this is like a "Prime Time" or "Five Seven Live" Christmas special, with all of the top financial guests here today and a couple of politicians. I hand it to all five citizens who have come before the committee. They make a very valuable contribution to the national debate on this area, not only here but in the media and newspapers and in their academic and business life. It is much appreciated by me and, I am sure, by all committee members.
Mr. Burgess raised questions about the evidence Genworth gave this morning on the number of mortgages. The committee should check this and write to Genworth with the concerns raised by Mr. Burgess and try to get an answer. He raised a big issue. Mr. Burgess also mentioned allowing early access to pension funds. Would this mean in practice allowing parents approaching pension age early access to their pension funds to pay for a child's deposit?
Mr. Brendan Burgess:
Somebody aged 23 or 24 who hopes to buy a house in four or five years time will find it very difficult to save. If they see house prices and rents increasing they will panic. I suggest that if they realised they could access part of their pension fund to provide a house deposit they would be highly motivated to save. They would get into the habit of contributing to a pension, which would be very good.
I do not have much to say at this point because much of it spoke for itself. I just hope that people are listening to what the witnesses are saying because there seems to be a "gung-ho" approach to this. It seems to be a case of going ahead on the basis that it's an answer to prayers. I do not know whether Dr. Lyons was being cheeky when he referred to whether we have or do not have a social housing strategy and this would be good if we do not have that. Does he think we have a social housing strategy now?
Dr. Ronan Lyons:
I would not call myself an expert on social housing but I think an overhaul of social housing is needed. It is not just about the money. It is about how the money is used and how the rents are paid. As I understand it, a normal social housing system works along two principles. The first is that one borrows money to build social housing and that gets paid back over a 30-year period. I think we are drifting back into that but for too long, it was capital grants-based where it was a case of "once you have it, you have it and when you don't, you don't". This is definitely not counter-cyclical, which is what one needs for social housing. The second element concerns the rent a social housing tenant pays. To put it bluntly, at the moment, they are paying such a small fraction that the cost then falls on the taxpayer who has limited appetite for that. Under a system that is much more commonly used in the rest of Europe, a fraction of a person's income up to a maximum goes on the rent and the taxpayer pays the rest. This then prevents any perverse incentives around not wanting to get a higher paying job or to get out of a certain income threshold.
Do we have a social housing strategy? There was one launched yesterday but I do not know if it is called a strategy. Is it where we need to be in ten years time? I think it is still well short of that. It is still far more a private rather than a social sector and this affects many families. We have a very limited social sector compared to other countries in Europe.
A point that was raised by Mr. Deeter and possibly by others was the issue of repossession triggering the payment of insurance and the possibility that this would increase repossessions or drive a need for repossessions. What obligations do the banks have to ensure that borrowers are pursued for every last cent before the insurers are prepared to pay out on the policies? Presumably, with any insurance policy, one must mitigate one's losses so does that include the bank going after the borrower to the greatest extent possible.
Mr. Karl Deeter:
I suspect that because of the difficulties lenders have with repossessing homes and the fact that insurers in this area were supportive of legislation that made it harder, they probably do not want to see repossessions because that triggers their indemnity. If they have a way of keeping the person in situ so it remains the bank's problem, there might be a weird set of incentives.
If we are talking about pensions and access to them, at a time of increased longevity where people are not saving enough already, giving them money from their future pot that will keep them going could be a mistake. By definition, a mortgage or at least credit involves moving money through time so one is reaching into one's future. Let us suppose prices stay the same. If one bought a house for €100,000 and after ten years, one owed €90,000, that €10,000 difference constitutes one's wealth. Mortgages in a way are like forced savings and are quite beneficial in that respect. When people get to an older age and they are mortgage-free, it helps them to take on the income shock that retirement represents.
It is important to realise that being able to access that credit is important and it is important in terms of household wealth. We are probably not the people who will be affected by this. We include a professor, someone involved in a finance, a lawyer, a barrister and another accountant. We are all successful people. The people I see who are discriminated against financially work in real, regular jobs and the banks are already starting to look down their noses at them. Any move in this area will have many bad outcomes. As I said, a person's household wealth at retirement is mainly made up in the world of home ownership, regardless of whether it is ideal or not. That is a fact. Home ownership should not be discouraged by stopping people from getting credit because most of the loans are working out. Most homes do not get repossessed and the majority of them do not go into arrears.
Dr. Ronan Lyons:
I will follow on from the point made by Mr. Burgess and Mr. Deeter about dipping into pensions One can flip it around and say that the transition is important but if we leave it aside and think about somebody in their early twenties now who knows they have to save 20%, 15% or whatever it turns out to be for a deposit, that could have a beneficial effect on private pensions because people in their early twenties will put aside a certain amount of their income as they know they have to save for a deposit. The day they get their mortgage, that fraction of their income that they save is switched from saving for a deposit to saving for a pension so there could be a beneficial effect on savings behaviour. Saving is all about habit and habits are persistent. That was one thought that needed to be thrown into the mix.
Mr. Brendan Burgess:
A very interesting point was made about whether mortgage indemnity insurance would increase repossessions. If one asked me that yesterday, I probably would have said that it would. I do not support mortgage indemnity insurance but I was persuaded by Genworth's argument today. In the paper it submitted, it said that over the past five years in Ireland it had worked with lenders to help 15,000 families stay in their homes ahead of foreclosure and has paid over €70 million. The standard policy for mortgage indemnity insurance only pays out on repossession but we could make sure that the actual policy is changed so that it would be adapted to Irish circumstances and facilitate split mortgages, etc. Genworth claims it has done this and I am taking that at face value.
In other words, whatever system is agreed, if the Central Bank was to go with this, it would be very important to have conditions relating to whatever our objectives are in respect of keeping people in their homes-----
Mr. Brendan Burgess:
It is not zero. If I said zero, I did not mean to say it. It is very small. In most other countries, if a person falls behind, their home is repossessed. Split mortgages are not the practice. The overall point is that whatever policy we have should be adapted to the Irish situation.
Mr. Karl Deeter:
It is important to realise an insurer looking at a likely claim will always do things that are in its interest to reduce the cost of that claim so, again, what they were doing was not necessarily altruistic. If they made some kind of offer to pay out, particularly at a time when prices are falling, depending on the underlying policy, if it was a case that as prices fell and they expected that property to get lost anyway, the person was going to do a voluntary surrender and they were willing to help clear that, obviously they will ask to pay it now. As far as I know, the borrower will still be due any shortfall even though the bank may have received the insurance.
There would still be a liability in respect of the borrower. Perhaps some people are saying that mortgage indemnity insurance policies were there during the boom. I thought they disappeared some time around the late 1990s and early 2000s. Five years ago, a very senior bank official told me that had mortgage indemnity insurance policies been standard during the boom, the banks would not be in the trouble they are now in. I guess from talking and listening to the witnesses that this is not the case.
Mr. Karl Deeter:
Some lenders only bonded over a certain amount. In other words, one needed to borrow more than a certain sum. Other lenders continued to bond and they did not tell the borrower about it because they paid it on their behalf. AIB would have been in that camp and then stopped bonding. It self-bonded. The last one to do what I would call open bonding would have been KBC who did it up into 2004. That would be where before one's loan closes, one needed to cut a cheque to it but it typically only charged a person half of the cost of the bond before the mortgage was drawn down.
I thank the delegation for a very interesting conversation. I apologise to Mr. Burgess for missing his contribution. Being from Cork and being a landlord - for my sins - we do not have the same issue as is being experienced in Dublin but that is not to say that it may not happen. The situation now might have come about for different reasons. In the past it may have been caused by profit-taking by people who were buying and selling and there was an element of frenzy in the market. Dublin now has high employment levels and highly-paid employment and people want to live close to their work. Therefore, they are prepared to pay that bit extra and they can afford to do so but this is creating pressure on everyone else and especially those in the social realm. Mr. Burgess has referred to rents of €1,500 a month in Dublin, but rents in Cork which had been €1,000 a month for a typical two-bedroom apartment, dropped to €750 a month and have risen to €900 a month and the value of the properties are still only about 45% of their previous value. We are nowhere near.
We should speak about the categories of those for whom we need to provide housing. For example, the garda and the nurse couple are looking for a house but other different members of society are also looking for housing. A councillor in Cork recently recommended that a person should have at least two or three children in order to get on the housing list. I am not making any judgments but it is something we need to take into account. There are a high number of family break-ups which in many cases result in a requirement for two houses for a family in that a parent living alone will need to provide accommodation for the visiting children. Demand is building from a variety of sectors. It is difficult to provide the correct balance when framing legislation. Sometimes when one speaks about this situation one is accused of being cold-hearted with regard to very difficult human circumstances.
Many landlords, including myself, would prefer not be landlords - we would love to be able to disappear out of that sector. We came in during the high times and we are losing money every week, month and year. We have borne the brunt to date and there is talk now of caps on rent. That is the other side of the argument. Now would be a nice time to be coming into the market. However, that group of investors are still there and those who are paying their way are still being punished for their bad decisions.
The cost of building a home in Cork and Kerry and other parts of the country is still greater than the cost of purchasing a house. While our conversation is important in the context of Dublin we need to distinguish the regions. It could be that the answers for the Dublin situation may also be the answers for Cork and the rest of the country in the future as things lift. We need to discuss the type of housing we need. I do not agree that everybody in Dublin needs a three-bedroom semi. We should have considered building proper high rise buildings. The only reason we built three-storey houses was in order to squeeze more rooms into a lower footprint but a three-storey house is impractical for family living. We then built progressively smaller apartments and because the owners could not sell them they are finding them impractical accommodation for raising a family. It may be necessary to build high-rise buildings in the Dublin area unless we want to have people travelling long distances from outside the city. A significant conversation is needed in this regard.
It was not so long ago that ghost estates were the topic of conversation. People were house-hopping; they would rent a house and then move on to a nicer, newer house. This hopping was at a severe cost to the landlords.
There is a sizeable problem of anti-social behaviour in many estates - although this is not particularly confined to social housing. Landlords have to deal regularly with this behaviour. Certain tenants can make life miserable for everyone else. There are no mechanisms for dealing with people who are not behaving as is appropriate in a community situation. I ask for the views of the delegates on those points.
Mr. Brendan Burgess:
On the difference between Cork and Dublin, one of the issues with mortgage indemnity insurance is that the insurance companies will probably not provide it in areas where they consider the price is too high. I gather they are not providing it in London at the moment because the prices are too high. They probably look at Cork and decide to give mortgage indemnity insurance in Cork because they decide the chances of a claim are much lower. They tailor their product on a regional basis.
I was not fully sure what point the Deputy was making. Is he saying that if the Central Bank immediately introduced an 80% maximum loan that the average family unit in Cork - a couple in their late 20s or early 30s - would, with prudent saving, save up to 20% of a deposit-----
Not as much because what they are being asked to fund is quite low - it depends on what job they have. Auctioneers in Cork say that people are managing to cobble that money together pretty much. In the Kerry region an average house would cost less than €100,000 and in Cork, €150,000 is still a lot of money. It is not like in Dublin where prices seem to be moving at a different rate entirely.
Yes but the challenge here is to look at the housing stock and what type of housing stock we want for Dublin. Even though people do not like the look of high-rise buildings, a suitable high-rise means that people can actually get to work quicker. I am one of the people who spends three hours going up and down the road and it is just such a waste of time.
Dr. Ronan Lyons:
I agree with the gist of much of what the Deputy is saying. If we take the income of a couple - the classic garda and nurse pairing - for example, their income does not vary at all from one area of the country to another as they are on public sector pay scales. For a family with €50,000 a year in gross income, to be sustainable, a house can cost no more, including land and everything, than €150,000. One can buy a house for less than that in many parts of the country but if it is not possible to build for that price - we will run into a problem in the future because of the increase in population. It is certain it is not possible to build for anything like that in Dublin. The image of renting for a certain generation is that of the bed-sit, a room in an old house; for the next generation it means paper-thin walls in an apartment built in the 1990s, somewhere along the quays. However, people in other countries live in rented accommodation for all their lives. In that case, they are good quality units in which anyone would wish to live. There are such actors in the Irish market now but unfortunately it is limited by the high cost and certain oddities relating to the minimum specification about lifts and stairwells and orientation and car parking spaces.
Mr. Paul Joyce:
The points the Deputy makes raise the question of how the dots will be joined up in this conversation. Ostensibly, we are discussing the Central Bank's consultation paper, which was issued very recently. It sets out prospective standards that it seems will be introduced early next year. At the same time, there was an announcement yesterday on construction, social housing and so on. It seems a much greater timeframe is needed in which to have a wide-ranging discussion on housing policy in this country. It should include mortgages, social housing, private rented accommodation, etc. Instead of having this discussion, we are now having a conversation about mortgage insurance schemes in the context of people having to raise too high a deposit. It is isolated from the far broader question as to the direction of housing policy.
I thank the witnesses for their presentations. I found them very informative and enjoyed them also. "Enjoyment" is a word I do not use at meetings of this committee too often as we are usually bogged down with very serious and heavy financial stuff. The delegates put their views across very fairly and clearly.
Let me dig in a little deeper based on what the committee is tasked with. This matter has evolved in quite a strange way. Earlier this year, Construction 2020 included a commitment that the mortgage insurance scheme would be rolled out by the Government after economic analysis. Its inclusion in the Finance Bill was to depend on the economic analysis. It now appears it is over to this committee. This is it; it is we who are making the proposal to the Government on this. Therefore, the delegates' input is very much welcome.
I actually came out against this scheme when it was originally mooted. I questioned the Minister for Finance, Deputy Noonan, on this. The transcript states:
All we are talking about anyway is the State [we were talking about the State at that time] covering 10% or 15% of a mortgage for a limited period, to get somebody over the hump and into a house. Then they might get promoted at work after the five years or whatever is the time period we decide. It would be for first-time buyers and there would be a capital cap on it. We will return to the issue again. If I proceed, it will be announced in the Finance Bill.Obviously, the Government is no longer thinking about State involvement but about private sector insurance, with the possibility of caps. We have to discuss caps and I would like the delegates' views on them. If we were to proceed, would it be important to have caps?
As I stated, I do not support increasing the loan-to-value ratio to 95%, which was the Minister's intention. The Minister suggested that, while it failed in London, it increased supply by 30% outside London. He argues this is a supply issue. I am not suggesting it is but would like the delegates to comment on that.
With regard to phasing in, Mr. Burgess mentioned an arrangement such as the one under discussion. We are making a mess of this. When I say "we", I am talking about the institutions of the State. My hunch is that the Government announced the increasing of the loan-to-value ratio to 95% without proper thinking. The Central Bank was not all too happy. The flag was budget day so the Central Bank said it was reducing the loan-to-value ratio to 80%. Mr. Deeter said he does not agree with either ratio. There is a genuine question to be asked. We have two different proposals that are not running together and we are supposed to be making a determination on each of them. The big problem is that if the Central Bank goes in with an 80% loan-to-value ratio, which we probably need in Ireland, we must ask what it would do when there is a social housing crisis, a rental market crisis and a lack of property. How do we fix the problem at this point? Is mortgage insurance a part of the solution?
Do the delegates believe this will deal with the supply-side? With regard to loan-to-value ratios, if mortgage insurance were to be introduced what limits should apply? Do the delegates believe 95%, which is the conventional percentage across areas where this operates, is the appropriate figure? Should it be lower? Do they agree that if mortgage insurance were introduced, it should be targeted at first-time buyers? Do they believe in caps? Alternatively, do they believe we should stay 100 million miles away from this on the grounds that there are other issues to be resolved and that mortgage insurance is not part of the solution?
Mr. Brendan Burgess:
If the Central Bank brings in a loan-to-value ratio of 80% on 1 January, as proposed, and we do not have mortgage insurance or anything else in place, it will make the problem far worse. People who are now thinking of building houses will not build them because there might not be buyers available for them, certainly in Dublin. I do not know the position in Cork well enough. If the cost of building in Cork is higher than the sale price, they will not be building in Cork anyway. That is the first point.
I suggest that a limit be introduced on 1 January, and that should probably be 90%. It should be indicated that it will be reduced in time. This would then allow us to deal with the question of how we help first-time buyers to buy houses. Perhaps we should reduce the limit from 90% down to 80% in time but leave it at 90% for first-time buyers, or leave it at 90% for new houses. My main concern is that if limits or any changes are introduced suddenly, it might exacerbate the worst problem we are all experiencing, namely, the shortage of housing. I would like to see the limit introduced in time. I do not want to see mortgage indemnity insurance but I believe first-time buyers must be helped. My proposal on giving them early access to their pension fund would help them to get onto the housing ladder. That would be the best approach.
Mr. Paul Joyce:
With regard to the supply issue, let me quote again the article I referred to earlier on the Canadian experience. The journalist states:
Therefore, there would seem to be a supply effect. However, the journalist also states:
It [mortgage insurance] is one of the reasons why Canadian banks continued to lend mortgages even in the tumultuous years after the financial crisis. Thanks to that, spending on homes and construction has given the economy a big hand.
But mortgage insurance has also inflated home prices by allowing people to buy homes they otherwise couldn’t afford. If the market were ever to crash, those who have overextended themselves will be hit hard.While it improves matters on the supply side, the consequences in terms of house prices, potential over-indebtedness and arrears must be borne in mind.
Senator Byrne asked earlier whether this prevents repossession. That is a really important question but I do not believe any of us has a concrete answer to it.
Mr. Karl Deeter:
It is important to read the Central Bank's proposal carefully. Most of this is about bank protection; it is not going to solve the supply problem. No one is suggesting 100% mortgages, but 100% mortgages valued at seven times one's income have a lower default rate than 90% mortgages three or four times the income. How does one explain that? I do not know that it can be easily explained away given the empirical evidence. The empirical evidence does not indicate it solves anything to do with supply. The Canadians are saying they have had a positive supply experience but they probably did not have the type of oversupply and collapse we had. They did have a collapse in the early 1990s, and it was expensive and they learned hard lessons from it, just as the Americans did with the savings and loan crisis. However, if there is an absence of housing and one keeps people out of the market, it just means rents go up. Rents have an implication for capital values, and capital values increase. Therefore, there will still be a lifting on both sides, no matter what one tries to do to get away from it. No one has the alternative of some kind of substitution, which basically involves living in a box or something. That alternative does not exist in any of the categories, including social housing and private housing. I do not know whether this will fix anything concerning phenomena such as housing standards.
If one wants a conversation about what we need to do, it should cover the relaxing of building regulations. According to the building regulations, the height limit for new builds in Dublin is 13 m although a Georgian house is 21 m tall. How does one explain that? We are actually saying one must construct buildings that are lower than those built in 1710. There are many stupid things. Mr. Lyons did a piece on the television some days ago in which it was said one cannot construct a north-facing apartment. There are so many factors that prevent supply that I cannot really envisage how the proposal in question will resolve the problem.
Dr. Ronan Lyons:
Every economist in the country shed a little tear when the Minister for Finance spoke about tackling supply by boosting demand. It is such a basic error in economics. Let me use the analogy of dousing a fire with fuel instead of water and hoping the fire brigade comes along. It is the worst way to tackle the problem so I favour credit rationing. My research suggests that if one increased the loan to value a first-time buyer receives by 5% then one will increase house prices by 10%. Therefore, going the other way should have a similar effect on dampening house prices. A phasing-in period needed. My preference is for a 1% increase per year so that means it will increase from 15% in 2015 to 20% in 2020 which would get us to where we need to be. It would mean people in their early 20s would know they must save. It also gives scope to people who are thinking about buying next year but do not have a 20% deposit.
Perhaps Mr. Maguire will respond to my query in the second round. The delegation is opposed to mortgage insurance so I shall focus on Central Bank matters. The Central Bank allows for a 15% deviation on the rate whether it is 85% or 80%, as suggested. Should the deviation be for homes that are capped or for first-time buyers? Has the delegation views on the matter? Recently I had an opportunity to spend 24 hours in Canada. In a couple of years' time I do not think we will be talking about Canada as an example for anything as I think it is in for another big shock and a lot of people will be hit hard as a result. I would like the delegation to focus on my question on the 15% deviation.
I think Mr. Deeter mentioned that the loan to value ratio breaks the link between income and the value of a house. It is my understanding that this insurance model supports the banks but not the individual and it will be very rare that one will end up in one's own house. The insurance model will ensure one does not lose one's home. If one has a lower loan to value ratio there is more likelihood that one will stay in one's house even if the economy and house prices collapse. That is a protection afforded by the scheme although difficulties will still exist.
Income limits have been retained. Do income limits not maintain the link between income, which is never certain in the future, and the value of a house? I know my comments are jumbled. I think it was Mr. Deeter who mentioned breaking the link between income and the value of a house and, therefore, I ask him to tease out the matter.
Mr. Karl Deeter:
I do not know if it was me but it might have been. I can assure the Deputy that I know a lot about underwriting. If he has queries on how the banks get around rules or how they take task with any of these things then those are all things I would be happy to tell him. I have been through the wild years where every single known trick was used and I have seen how things are now so know that what we have now is a lot better.
We are having this conversation but bringing in the cap in January is being talked about and, therefore, property prices are likely to slow next year. The huge jump in prices in October alone was largely down to a rapid level of closings being done before the capital gains tax exemption left the market. That issue had a huge impact on the sector. I have seen evidence on the ground where people have been outbid. There has been talk of preventing a wave of mortgage credit but over 50% of the market was cash which has a zero credit imperative. Some of things that we are being warned about are irrelevant. I want people to realise that we need more houses and built in a responsible manner. Our suggestion is to make affordability more restrictive than what is being done elsewhere.
I appreciate the latitude shown by the Vice Chairman. Mr. Deeter is right in what he said about cash buyers. Is that situation not part of the problem? We have the ingredients of a property bubble without the credit and we have a lack of supply. When supply is greater then credit will come on thus leading to the same type of frenzy we had in the past. That is my fear and understanding of what may happen.
Mr. Karl Deeter:
Part of the issue is the behaviour of credit when every unit of supply is marginal. At the moment we do not have a huge vacancy rate so every additional housing unit means all housing units are occupied. In other words, if someone moves into a unit then he or she has moved out of another one. It is very much just people moving around. The market is trying to cope with the excess demand that exists.
In terms of a wave of credit, the present underwriting standards will not allow a person to go wild. I can say that because I know the underwriting standards. I am probably unique in this room due to having that bit of information. One must be able to strongly justify one's case and have a proven ability. They deduct money if one has kids. They deduct money or one's affordability left and right. These are stress tested loans. Let us not forget that the Central Bank already stress tests credit. This scheme is based on high variable rates. It is not some kind of special rate that lets one leap over and get some big wall of reckless credit. There is none because one cannot get it.
Mr. Karl Deeter:
I am just giving an alternative future to that situation. Let us imagine if we adopted this rule, we would all walk out of here happy with ourselves for having saved the future but then people could not afford to buy the houses that need to be sold at a certain cost in order to be justified. The rule further compresses the problem. That means when we eventually give in on loan limits, as everyone does and the same as they did back in the late 1990s, a credit wave would be created. The credit wave did not come in 1996 to 1998, inclusive, when there were double digit rises every year. It came along after that because we stymied the ability of credit to be created when it was needed. There are downsides for whatever one does. We are not going to win and no matter what happens we will have a housing crisis.
Mr. Paul Joyce:
I wish to respond to the original question of who should benefit from the 15% deviation on a 20% deposit. Ideally, it should be first-time buyers with a very good credit rating. How can we have a very good credit rating when the Credit Report Act 2013 has been passed by the Houses of the Oireachtas and the Central Bank, in its consultation paper, tells us that the central credit register is not expected to be up and running until early 2016? If the pieces do not move along at the same pace then it becomes part of the same problem. Everything is now suddenly being done quickly but not in a coherent way.
I welcome the visitors. I agree with what Senator Thomas Byrne and Deputy Pearse Doherty have said, that these visitors have played a huge role in formulating public policy on these issues.
We had the insurers in this morning. As raised by some speakers, not only do we have a bank regulation problem in Ireland, we have an insurance regulation problem as well. We went through the list of ICI, PMPA, Quinn and now there is Setanta. Genworth has been recorded, in the last quarter, as having losses of $844 million. Who will bail it out if we have it here? Another one of the presenters was associated with FBD, which had a profit warning a while ago, but he only brought out the profitable bit of FBD. Do we have standards for insurance companies? Like the banks, they seem to think the taxpayer is a handy number.
Mr. Ross Maguire:
In the United States shortly after Lehman Brothers collapsed the AIG group, from recollection, required enormous support because it had insured against banking losses.
The initial proposal was for a State-backed fund but the Minister for Finance seems to have moved away from the idea now. If it is a private fund then the question is whether it would go to the taxpayer in the event of a default. The Senator made the interesting point that these insurers are only as good as their resources allow them to be. Fundamentally, this is about undermining a credit restraint policy being initiated by the Central Bank.
Mr. Brendan Burgess:
When Genworth issued its policies in Ireland it was a subsidiary of GE Capital which is a huge international organisation that has plenty of capital. I would have been far more comfortable with it than with a stand-alone group.
I am against mortgage indemnity insurance but if we do have it, I liked the Jardine suggestion this morning that it would be provided by a pool of insurers all A rated rather than relying on one A rated insurance company.
In Canada, if one takes out a 90% mortgage, one pays a premium of 2.4% of the entire mortgage. If one takes out a mortgage of €200,000, one will pay a premium of €5,000. That goes to a state company. Was Deputy Doherty implying that there will be problems with mortgages in Canada?
Mr. Brendan Burgess:
It is exactly what people, including myself, were saying in 2006 that we expected a soft landing and that everything was fine. The Canadian Government is on the hook for $580 million of mortgages. It is not just a sliver; it is the whole lot. The head of the central bank there has said there will be a soft landing. It is crazy stuff.
In his paper, Mr. Burgess knocked €67,000 off a €300,000 house. Dr. Lyons has been making that point for a very long time. The real problem we are addressing here is that housing is far too expensive in Ireland. Our fathers or grandfathers could get a house for two and a half times their income. What is wrong with the Irish construction industry? I would like the witnesses to say how houses can be reasonably priced in whatever sector, whether social housing or housing to buy. Is the only efficient part of it the one-off rural house which comes in at a price people can afford?
Dr. Ronan Lyons:
I try to bring this up and there are two reactions. The first is that one is completely determined by markets and that if one had no profits, then surely one would be able to build. Unfortunately, even if one had a zero cost of capital and one had some sort of co-operative scheme where nobody wanted a return, one would still not cover one's cost. The second is that one is just anti-regulation; one does not like regulation. That is not the point. Regulation brings benefits but it brings costs as well. It is understanding that certain regulations bring costs that are worth paying while certain ones do not.
I am not sure why a citizen in Copenhagen, Cologne or Cork can live in a 75 sq. m two-bedroom apartment but one cannot do so in Dublin. Somehow it is inhumane in Dublin but it is okay everywhere else. It is the same with north facing or east facing units. It seems like a small point but, as happens with some sites, the majority of the site is north facing and east facing, it can effectively make the site unviable. What we have is a certain set of preferences which have been caked into the minimum standard.
I appreciate averages in Dublin need to increase. The average size of units should go up. The fact that the minimum now is so far above everywhere else means that it is far above people's purchasing power. To be able to afford a two-bedroom apartment, one would need a gross income of €140,000. We need to get that cost right back down not by cutting corners but by redesigning how we make homes. That applies to social housing as well. We will not be able to afford social housing with the current system.
Mr. Karl Deeter:
I have built and renovated houses. When I was younger, I used to work in construction. I was not smart enough to get a good internship. The cost in terms of GDP per capitain all developed countries in the world has gone up for houses. One must bear in mind world population rises and city population rises and that scarcity increases in cities. That is typically where one sees the highest compression in land values.
We do not tax vacant land. That is a huge missed opportunity. Not only that, the place Senator Barrett's dad bought - I do not know his vintage but I am guessing it was a while ago-----
Mr. Karl Deeter:
It probably did not have central heating when it was bought. It was probably not built on a foundation full of reinforced steel bar. It was probably built using standard brick construction with very little insulation and maybe some felt and tiles on the roof, but that was it. The standards today are so much higher, so it is not really a comparable argument. When people do up older houses, that cost is a cost push for the next buyer. It passes through.
Mr. Paul Joyce:
Back in the days of the two and a half times one person's income and one times the partner's income, there was a lot more subsidised housing. There was a time when people on the average industrial wage lived in publicly-funded housing. We have moved away from that model. We heard announcements yesterday but the crisis has already occurred. Part of the problem is a lack of publicly available subsidised houses and that is the State's responsibility.
Dr. Ronan Lyons:
The one thing is the leaky bucket. If the State invests money in helping someone to get a house, the State should have some claim on that. The idea of building a house, giving it to someone for below market rent and then at some point deciding to give it to someone is a massive waste of taxpayers' money and private households benefit at the expense of the general taxpayer. That has happened for generations. It is a tempting thing to vote in but it is a major issue.
Mr. Brendan Burgess:
If a semi-detached house in a part of Dublin sells for around €300,000, there is approximately €37,000 VAT in that and €10,000 for social housing in that the builder must give a percentage of the site and build a house. We are asking buyers of new houses to pay for social housing. As someone who bought a second-hand house years ago, I do not have to contribute to social housing. I can get a grant to do all the sustainable energy work in my house whereas a first-time buyer is told from the get-go that he or she must have solar heating and various other things like that. They are probably a good idea. I do not know about the north facing site but it is probably a good idea to have those energy saving things. I am against State intervention but if the State imposes a standard like that, maybe it should contribute to the cost of it.
Mr. Karl Deeter:
Right now, if one wanted to turn a Georgian building into four good size apartments, one would never get over the Part M disability access because it is a material alteration. Even if someone let one put a ramp up to the house, the conservationists would jump up and down and have one shut down. I know we keep talking about a shortage of housing supply. In a way, we do not have a shortage. We have a shortage of usable housing supply because there is a huge amount of dereliction and unuse throughout the city. Utilising that would get one around a lot of these things.
Senator Hayden and I found out in the Seanad that of the first batch of NAMA ghost estates offered, 10% were accepted by local authorities. I think it has gone up to maybe 40%. If one put them on the market, what would it do to price and availability because they are going to deteriorate? They are in the wrong parts of the country but one can commute to Edgeworthstown or wherever.
Dr. Ronan Lyons:
There are about 180,000 units in ghost estates. Approximately 100,000 of those are not even built but have planning permission. Of the 80,000 remaining, about 45,000 were occupied in 2011. I think the figure is 50,000 now. One is now down to something of the order of 25,000 to 30,000 units, which are half built, largely built or built and empty. That is not a lot of demand in terms of months of transactions, in particular when one starts to look at the areas. There is basically next to nothing in Dublin. It looks like it is two weeks worth of rental supply in Dublin. It is not that it will make no dent. In certain areas, it could make a big dent if one bring 100 houses on stream near a village but for the country as a whole, it might be a few months worth of transactions.
I will take an opportunity to ask a couple of questions. I refer to the limits themselves. The Governor of the Central Bank appeared before the committee yesterday and indicated that the intention in introducing these limits is effectively prudence within the financial system as opposed to looking at borrower interest per se. It is really more in the context of its role as the arbiters of the financial system.
Do the witnesses think that the limits on loan to income and loan-to-value ratios set out in the report by the Governor are the correct limits? While there is a limited amount of room for manoeuvre within the ceilings set out, is there a real linkage between those limits and a person's capacity to reasonably afford housing?
The witnesses partly answered my next question of whether a mortgage insurance scheme should be limited to first-time buyers. If the witnesses do not think it should be limited to first-time borrowers, what category of borrowers should be included in such a scheme?
I am happy that some of our discussion has referred to the general question of home ownership rather than focusing specifically on mortgage insurance schemes. Several witnesses appear to think the introduction of these limits, and the timeline on them, are premature because we need a broader debate on home ownership. One of the issues that regularly arises is housing supply. Some of the evidence presented to us this morning in regard to the UK indicated that similar mortgage deposit schemes have stimulated supply. Some of the witnesses appear to disagree with this. To what extent do they accept that a mortgage insurance scheme would improve supply?
The Governor indicated that he does not think access to credit creates greater equality. I am not convinced that is so. If one considers, for example, the type of finance available to people on lower incomes through the local authorities in the 1970s and 1980s, it is not true to say that access to finance for lower income households did not create equality. Access to finance offered access to assets, which does in fact provide more equality in society. I will not outline the data but I can assure the witnesses that numerous journal articles have been written on the subject. If we do not go down the road of putting in place some means whereby people who have a capacity to pay, in other words, they are going to be paying rents that are possibly higher than the amount of mortgage they are asked to pay but do not have the resources to come up with a deposit of 20%, are effectively being locked out of life opportunities that will enable them to have the type of asset base that other people who are lucky enough to have wealthy parents can access. Given that some of these are societal issues - I accept they are not necessarily issues for the Central Bank - and that the committee has been asked by the Minister for Finance to consider this question because he wants our views on it, is there an interface between regulation and issues that are important to society? How do we deal with those issues, if that is not too broad a question?
Dr. Lyons referred to apartment developments. I had reason recently to be involved in a very extensive discussion about apartment developments in Ireland during the Celtic tiger years. He asked why we need higher space standards in Ireland than apply in Copenhagen or Barcelona. Apart from the fact that we had pathetic design in this country between 1990 and approximately 2005 - I make no excuse for saying that - we do not have communal facilities or services and our society does not have a history of apartment living. For these reasons, it is a broader issue than the internal four walls of any particular apartment.
Mr. Brendan Burgess:
There should be a limit of 80% generally. In particular, it should be on people who are buying a second home. Nobody buying a second home or trading up should borrow more than 80%. By definition, second time buyers would not need mortgage indemnity insurance. In the longer term I would like to see a limit of 80% on first time buyers. I am surprised Dr. Lyons suggested that if we reduced the limit to 80% now it would not affect the supply of housing. My gut feeling is that it would affect supply. I would make an exception to the 80% limit for first time buyers and, probably, for new houses. However, I like the overall limit of 80% and if a mortgage indemnity guarantee is introduced, it could only be for first time buyers because they would be the only people allowed to borrow more than 80%.
Mr. Ross Maguire:
The equality issue is important. It is argued that the introduction of regulation will price certain people out of the market and they will, therefore, be disadvantaged. Senator Hayden gave the example of somebody with rich parents who can afford to pay the deposit and, therefore, has an advantage over somebody who does not have rich parents. The reality is, however, those parents are there anyway and if the two borrowers are competing in the market in the absence of the 20% deposit, the child of rich parents will have extra cash to outbid the person without rich parents. That example does not hold water when it is analysed and, ultimately, those who come from better off backgrounds simply have more access to money or credit. They have more purchasing power, however it comes, and the price will be driven up. I genuinely believe the Governor is correct in that too much credit in the system leads to gross inequality. I cannot stand over any particular academic data but my sense is that Ireland is a more unequal society now than it was some years ago. That is partly the result of excess credit. The Governor pointed to the important example of the United States, where credit is freely available but where inequality is at an unacceptable level. This is a big societal issue.
Mr. Karl Deeter:
He was referring more to wealth than equality. That is where the conversation needs to be. Equality in terms of credit is like ninja loans, that is, no income, no job, no assets. That has terrible outcomes. I am glad to see, after five years of chatting with Senator Hayden, that we agree on something. She was referring to the fact that housing wealth is actually the main wealth in the world. To take the example offered by Mr. Maguire of two different people, one of whom has rich parents, we are not saying they are bidding for two different houses but the person who gets locked out stays renting. Every month he or she has a fixed overhead because housing is an overhead that cannot be avoided, and the person in the mortgaged house also has an overhead. The difference is that the person in the mortgaged house has a balance sheet improvement every time he or she makes a payment, whereas the person in the rented house does not. One can speak about equality but this is really a question of wealth and it goes beyond the argument of equality, which is total bunk. Ultimately it is about lifetime wealth. The Central Bank says this is about prudence. That is fine but prudence does not cost the bank. Prudence comes at a cost to the people who are locked out and are forced into this life of reduced wealth that we have just described. If they have access to an insurance scheme, they also have to pay the fee for a bond. It is claimed this will stop people from taking on more than they can handle. One can stay in the rental market and take on more than one can handle.
The level of rent arrears is very high and local authorities, in this regard, make those who dealt in sub-prime mortgages look like risk experts. The rent arrears situation for local authorities is absolutely catastrophic.
If a person can save money while paying a high rent at a time of high taxes it is proof he or she can carry a mortgage. The loan to value ratio is not the question; it is a matter of cost. If interest rates are forecast to be low, as they are for the next three years, then it means our capacity to raise interest rates will have a lower ceiling before the next recession kicks in so I cannot say that this move will have any societal benefit. It will help incumbents and give money to insurance companies but it will not fix our problems.
Mr. Ross Maguire:
I will not cross swords with Mr. Karl Deeter and Irish Mortgage Brokers but I feel the Governor is correct regarding the consequences of excess credit. It is only a couple of years since we crashed the ship of State on the rocks and this crash occurred due to arguments suggesting home ownership is good and should be undertaken as quickly as possible. These arguments failed spectacularly and we should not repeat recent mistakes.
Mr. Paul Joyce:
FLAC used the term "reckless lending" long before it was either profitable or popular. It is extraordinary to us that after an era with no controls on lending, despite calls for prudence, we now have a paper proposing to introduce limits on 1 January that suddenly must be implemented very quickly. There are still serious and detailed questions to be considered. The questions asked from the Chair are excellent and very important for a debate like this. Regarding affordability, the consultation paper suggests a three and a half times loan to income ratio should be the limit but this does not take into account other debts that must be serviced. The paper simultaneously uses the term "debt servicing to income ratio". There is a huge difference between a person who comes into a mortgage carrying unsecured debt, for example, relating to credit cards, personal loans, various types of insurance and so on, and a debt-free person who borrows using a three and a half times loan to income ratio. In trying to define "affordability" in any application, surely a person's entire financial circumstances must be taken into account. Without a fully-functioning full disclosure and central credit register, how can this be done? It may seem surprising for FLAC to take this view but we should proceed slowly. There is some truth in the assertion that, at the moment, creditors are mostly self-policing, for understandable reasons. Perhaps there is an opportunity to have a wide-ranging and lengthy debate on hugely important issues for the future of credit and housing in Ireland. There is a tension in the paper between access and potential difficulties, particularly repeated consumer over-indebtedness. This is a difficult area to address quickly.
Dr. Ronan Lyons:
On the first question, regarding exact limits and loan to value ratios, I agree with Mr. Brendan Burgess that 20% is the right amount but this should not be done overnight. A gradual increase from 15% to 20% would be better. We can talk about loan to income ratios in more detail if that would be of use but I do not think they are necessary once one has a loan to value ratio. I think loan to income ratios can do more damage. If the average house in Dublin is worth €400,000 and the average house outside Dublin is worth less than €200,000 the loan to income ratio could be binding in Dublin and not in the rest of the country, in which case it would have no impact outside Dublin. If it was binding outside Dublin one can only imagine the havoc it would wreak in the Dublin market, unless one would prefer a situation where only people with twice the average income can buy in Dublin. Loan to value is sufficient and loan to income can make matters worse, rather than better.
The question was raised as to whether deposit schemes increase supply. I may have misspoken earlier as I think deposit schemes increase supply in the most dangerous way possible. Quantities may be increased but this can only be done by first increasing the price and increasing the price of homes by giving more credit is the last thing we should do. If prices and costs are at a certain level one may approach the matter in two ways: one can increase prices, which is dangerous, or one can push costs down and this is a far healthier approach. If the Government chooses to simply give more credit it will have failed to grasp the nettle of the cost of building family homes compared to incomes.
On credit inequality, the reason we accept rent payments that are higher than mortgage repayments is mortgages are basically potential weapons of financial destruction - we in Ireland, of all places, must not forget that. Ask a person with negative equity of over €100,000 whether he or she would have liked consumer protection ten years ago and that person will answer "yes". People are not as financially literate as we would like to think and they need consumer protection.
On communal facilities, the only reason we have units from the 1990s and early 2000s is tax breaks. If the market was asked to provide units it would provide a very different kind of unit. Communal facilities are part of this and in the US developers are now building units for families.
Mr. Brendan Burgess:
May I make an important point on loan to income ratio? The loan to income ratio is essential as I spent a long time examining the lending practices of Irish Nationwide Building Society. Irish Nationwide gave mortgages as long as the loan to value ratio was low and did not care about income as a property could always be repossessed. The loan to income ratio is essential and this is the first time I have heard a person argue this is not the case. I wish we had more time to discuss this.
I welcome the witnesses and think I know all of them from our experiences of examining the wreckage of the economic crash. Having been in the lending business since 1979, I have seen a couple of cycles and recoveries and this experience helped me to determine the scale of losses for the Irish domestic banking scene. The Governor spoke of credit in the economy and so on but, in big picture terms, between 2001 and 2008, we grew from having a domestic banking sector three times the size of the national income to one five and a half times the size of the national income. This was madness as the incomes generated from the production of goods and services must be the servicing capability for national debt and household debt.
Up to 1985 household debt and the financing of housing were funded on a mutual basis in society. Long-term savings were used as funding for housing through the intermediaries that were building societies - later this applied to banks too. The arrival of new forms of financial engineering meant this was all lost as banks went mad increasing the reckless funding of their balance sheets - this was the engine of growth that delivered reckless lending. Financial commentators in Ireland have not made the connection that this lending could not have happened without crazy funding. The funding was the creation and responsibility of the boards of directors of financial institutions. These boards of directors have tiptoed off the stage and have not been asked to explain why they allowed the floor of the funding of the nation's fixed assets to become perilous.
We have heard that residential property values in Dublin have gone up by 23% in the past year but this is another big lie. It is a lie because the prices of transactions may be calibrated to have risen by 23% but the level of transactions as a volume is only one third of the normalised levels of transactions for a city of 1.25 million people.
As Mr. Deeter indicated, these are being funded to a great extent by cash, which has come from legacies, family transfers and savings that have no other place. Deposits are only paying less than 1% so people who have liquidity are bidding up the prices in the lower volume of transactions. It would be truthful for commentators and analysts to say that values in Dublin may have risen by approximately a quarter of 23%, or perhaps 5%. We should cross-check the figure.
When somebody or a couple enters a mortgage for 35 years when they are in their 20s, what is the alternative for the accommodation of their lifetime? What about a 35-year lease? Would that person or couple enter a 35 year lease for similar monthly commitments over the profile of the mortgage loan? It is a direct comparison. We hear about loan to value but what are people talking about in God's name? Is it the price of a couple of transactions that may have occurred on a road or neighbourhood? That would also be crazy. The rental value of a house - the subject of the transaction - is more important. What is the normalised, maintainable rental value? Whether a person is repaying a mortgage or a 35 year lease, it is a similar prospect for the accommodation of a house.
We heard a number floated of €400,000 for a semi-detached house in a Dublin suburb. If that three-bedroom house rents for €1,500 per month, at a 7% yield or 15-times multiple, the €1,500 would be €18,000 per year and €270,000 gross, before making any depreciation provision for the refurbishment and repair of the house over the 15 years. That is the economic value of the house. Alternatively, one can consider that if there is a mortgage of 35 years, what are the likely averages - in lumps of ten years - of interest rates over the 35 years. I remember paying 15% on my mortgage in 1981 and 1982. That was a variable interest loan. People get stuck on what is happening now but that is very unreal. There are trillions of euro sloshing around in financial markets, with negative real interest rates.
We must be very careful in joining the cogs in the market. We know there is an undersupply of housing, as 100,000 families are searching for a home. We also know that from the splurge of the reckless funding which led to reckless lending, there are another 100,000 households in deep mortgage distress. There is no worry about the banks getting into a gallop of credit expansion again, as they are trying to pull back and correct the funding models they have. They are doing that by putting a strain on the assets, or the loans they gave out in the past. They are doing horrible and unconscionable things to families. They now have people imprisoned for 20 years. The split mortgages are utter nonsense.
We are trying to join all these cogs or facts. The measure of 3.5 times a person's income today is not the same as the same as it was for a family 20 years ago. Why is that? The incomes are far more volatile, as people are on short contracts and living hand-to-mouth. The garda and nurse would have had a pensionable job where income would have expectation for incrementably increasing income but that is not the case any more. We should be careful and use these macro-prudential tools. As I noted, we should consider 90% of the economic value rather than the sale value; that would be 90% of the €270,000 figure I mentioned and not the €400,000 mooted by the market and the clipboard auctioneers. They are saying a property is worth that much because others were sold at that price. It is not.
These are the types of guidelines we employed for business in the late 1970s, 1980s and 1990s in ICC Bank. They are prudential because they correspond with reasonable, maintainable and expected income flows with the financial commitments on a more normalised repayment schedule and interest rate expectation.
I have one more point. The mortgage issue kicked off the discussion and that is another form of slicing and dicing. It is financial slicing and dicing by a different name. We must be careful of these matters.
I have but I will not hold him long. One of my relations has personal experience of the work done by his organisation and they are really good people. It seriously bothers me when I see banks repossessing properties and selling it for a price which the former occupant could afford to pay. That is slightly outside the insurance issue but does Mr. Maguire wish to comment on it before leaving?
Mr. Ross Maguire:
If the banks were to permit the borrower to purchase the property at the discounted rate, they reckon it would have to be done right across their books, which is the problem. It seems terribly unfair in circumstances where the borrower could afford the restructured mortgage. There are three categories of defaulting loans, with the first the loans that will fix themselves through the recovering economy. The second group comprises loans that are being restructured by the banks and, as Deputy Mathews has argued, many of these are potentially nuts. The banks do not know what to do with the third category of loans. They are substantial in number and somebody must think outside the box in order to deal with them. The idea of putting 20,000 or 30,000 families out of their home does not make any sense.
We touched on the Canadian issue. I am one of the oldies but I remember when Canada had its crash and the Reitman brothers came to London to experience a further crash on the first Canary Wharf. Canada had a credit market that went out of control in the 1980s. It learned from that and the people still remembered enough not to get into the stupidity of the early 2000s with the new financial engineering that took place in other Western economies. People thought Canada had a super insight into finance but instead it learned and had the prudential rules which kept everything related to maintainable incomes and rentals.
Dr. Ronan Lyons:
I remember reading comments from the Minister for Finance the day after the 95% suggestion much earlier in the year. He cited three countries, which included the UK and Canada. I spoke to somebody from the UK, Canada and the third country - it must have been Finland - and they all queried why their countries were being used as a good example. I am not saying I am an expert on any of those countries but if we are drawing insights from other countries, we must understand how those systems evolved and the impact and current feeling towards those systems rather than just assuming somewhere else has it right. Are they perceived as fair?
Most places believe they do not have it fully right. Some places are better than others.
Mr. Karl Deeter:
I know the Deputy’s vintage and I know that he also knows that the building societies regularly ran out of money which put significant financial pressure on people. They could not close on loans and there was credit rationing beyond what was reasonable. One of the side-effects of that was an increase in tenement-like conditions because when people could not buy a house they had to live elsewhere, typically with family members. That is when banks got into the game.
Regulators under Basel 1 encouraged securitisations of loans and the ability to take them off, for banks to make the next tranche of lending. That was not the banks. That was regulators. In the narrative, beating up on the banks is a great theme and will never run out of steam but there were lots of different forces in play.
Mr. Karl Deeter:
I accept that but Deputy Mathews made comparisons between a mortgage and a rent if they were set at the same price and that goes back to the effect of wealth. The person who took the mortgage, if it was exactly the same price as the rent, will at the end have a balance sheet gain or statement of financial possession which is a large asset.
Mr. Deeter is absolutely right but we also have to recognise that in the collapse what was so unfair for people at the lower end and in the middle of the spectrum of income and wealth was that the credit Ponzi scheme, generated by the boards of financial institutions, left a smashed economy in asset prices. The wealth of average families-----
I have just one statement - the wealth of the very wealthy is not in their homes; it is in other financial and stock exchange assets. They have all recovered since the crash but the people at the lower end of society and in the middle, whose only asset is their house, are still in negative equity. How unfair.
Mr. Paul Joyce:
We are now in a really dangerous situation with mortgage arrears. I know we are not here specifically to discuss that. The hangover from the boom is enormous. There are 10,000 odd repossession applications on the go. There are 37,000 mortgages on principal dwelling houses that have been in arrears for over two years as of the end of June. There is very little write-down going on, which involves writing down the principal to something sustainable.
I welcome the witnesses. I have been thinking about average Joe Garda married to, or in some sort of relationship with, average Jo nurse who buy a house. At the mid-point on the scale their maximum borrowing capacity is €300,000, working on the basis of a 20% deposit requirement, which I support. It is a way of cooling the market.
I am running a survey around the country of all county councillors. So far, the figures suggest we should consider a 10% deposit with a maximum of 3.5 times loan to income. If I were living in Mayo I might be able to buy a house. If I were living anywhere on the east coast, and certainly in the greater Dublin area, I cannot see how I could even buy an apartment. I spent last night debating this with my son and I see no insurance scheme that will allow me to purchase a property unless we come up with a way whereby the banks take equity in the house and release that over the lifetime of the mortgage. I do not believe our balance sheets are strong enough to take on equity in houses and I am sure there would be issues of fairness.
I cannot understand how on one street in any part of Dublin house A sells for €400,000 and the bank puts a certain loan to value figure on that but a month later house B two doors down sells for €450,000 and the bank lends the additional amount on that house. Deputy Mathews’ suggestion of the rental value being the-----
Mr. Karl Deeter:
Its stated position is that it is mainly to protect the banks. The empirical evidence is that it protects the banks. My opening statement was that I do not believe people are idiots. They need a roof over their head, whether they rent or buy it they will have to face an overhead. One can have a loan that goes bad or rent that goes bad, one might be a local authority tenant who cannot afford it or live in a caravan and not afford it. Affordability is an issue no matter where one is. People get income and expenditure shocks. These things can happen to anyone in any position.
I know from talking to families who are trying to plan their lives if one comes in from on high to try to save them from their future selves they have two responses: why make us pay more, and we do not want your protection. If we are that intent on protecting them because they do not know better we should raise the age of legally buying a house to 30 or some other looper move.
Mr. Karl Deeter:
Maybe we should not allow home ownership. Most people who build wealth do it through their homes. Yes, we do have a big mortgage arrears crisis. It does not represent the majority of mortgages and it certainly does not represent the majority of houses. Just because there have been problems in one part we should not wreck it for everybody else who has not had those problems. There are other ways to achieve better outcomes, even on the vista of existing lending, which is responsible and prudent lending. It is being well underwritten on good collateral with strong criteria. Property is heterogeneous and there will be different valuations on the same street. One house might be done up, one might be a probate sale, one might have an extension. Those factors will always apply. The question is whether the person whose finances on which the loan is secured is a good credit bet because it is underwritten on the borrower’s cash flow. There is only one chance to underwrite the mortgage.
Having bought and sold 13 houses in my life, I am thankful to God that the financial people I dealt with ensured that I borrowed at a capacity at which I was able to repay. What Mr. Deeter says sounds great but if that had happened we would not be in the situation we are in now.
Mr. Karl Deeter:
Most of the problem was not in residential property. There was also a fiscal disaster that was going to hit the country with or without anything that happened in residential housing. If we are to have any debate I will need the Senator to keep to empirical fact and what he is saying does not stack up empirically.
Mr. Brendan Burgess:
Let us take the Deputy's value of €270,000; 10% of which is €27,000. If I want to buy that house, I have to borrow €363,000. It has all gone wrong. It is just not possible to achieve everything we want to achieve. If the Deputy agrees that houses are overpriced, then he should be telling people to rent until house prices come down to the right level. That, by the way, is another very risky strategy because it is possible that Deputy Mathews is wrong and house prices are fairly valued.
One of the things that has come back in the survey is that we should regulate rent. This would give young couples the time to build capacity. There is a lot of talk at the moment about putting in an additional subvention through the Department of Social Protection in rent allowances and the like. Dr. Lyons made the point that a 5% increase in rent allowance will probably cause rents to go up by 10%. That was certainly the case with house prices. If we control rents, and control lending on the other side, we might find a balance somewhere.
Mr. Paul Joyce:
The problem in the private rental market is that rent payments may be greater than mortgage payments would be. It is interesting that the Central Bank's consultation paper discusses affordability in the context of mortgage borrowing but not of rent payments. If the Central Bank is saying that the loan amount should be capped at 3.5 times the gross income, equating to 40% of gross income, does that standard apply to rent? As is laid out in our submission, the average rent for a house in Dublin is currently about €1,300, and there are a lot of people paying far higher rents than that. A figure of 40% of net income would mean that a household paying this average in rent would have to have an income of nearly €3,200 per month, in other words €735.58 take-home pay per week. The average wage - not the average industrial wage - is €688.15 per week so there are clearly a lot of people, certainly in Dublin, who are paying much more than 40% of their net take-home pay in rent. The case that Senator Craughwell makes for rent controls is, in my view, very strong. If we control the amount that people can borrow without controlling the amount that landlords can charge people, which in some cases works out to be more than mortgage payments would be, that is an unconscionable situation.
Dr. Ronan Lyons:
We have a bit of a paradox with the rental market because everybody talks about how bad the Irish rental market is and when renters are surveyed they say the Irish rental market is bad for renters. However, when they are asked about their own experience, overwhelmingly renters have had very good experiences in the market. I am not trying to pretend there are no issues with it, but it is a bit of a conundrum that nobody seems able to say they are personally losing out. Everyone says they know that people find it very tough.
My worry with rent control is that is damages precisely the people whom we are trying to help. For example, say we have capped rent on a two-bed property at €1,300 and now the landlord has a choice of tenants. The rent is a signal that we need more units built. If we stop that signal we might have some positive side effects in the short term, but in the long run we actually hurt the chances of new units being built. A glorified version of what is currently happening to people on rent supplement will happen in the rental market. Landlords will be saying they do not want anyone on rent supplement, they do not want students, and they do not want groups of young professionals. They will only want to let to high-income couples with small children. There will be all sorts of discrimination. We can bring certainty around rent increases into the market, but as far as rent control is concerned, the road to hell is paved with good intentions. The group that will get hit by it is not the group in this room, but those on the lowest incomes.
The points made by Deputy Mathews and Senator Craughwell tie together and hopefully tie in with some of the comments I made earlier. Linking house prices to rental value and to incomes leaves us with the uncomfortable fact that the costs do not stack up. There is a troika - this is Peter Stafford's phrase, not mine - in the Irish housing market that is not yet aware that it is a troika, namely, the Central Bank, the Department of Finance and the Department of Environment, Community and Local Government. They effectively control the housing market but they do not do so in a joined-up way. We have measures that affect the mortgage market with no follow-up. I have discussed this with the Governor, whose response is that unfortunately he can only do what is in his remit. He cannot force the Department of Finance or the Department of the Environment, Community and Local Government to do the other bits. He can only do what he believes is best, and in his case, he has control over loan to value or loan to income.
On the issue of loan to income, I understand the point about bad lenders. The problem, coming back to Senator Barrett's point, is that the houses we now have require a greater investment relative to our incomes because most of the good additions to the minimum standards are about lowering energy bills. To lower energy bills, one needs to make a bigger upfront investment. That is good maths, because requiring people to have a certain minimum degree of insulation means they get the savings. That is, of course, a greater multiple of their income when we are just looking at the mortgage debt, but if we add mortgage, petrol, heating and electricity as the total stock of mortgage debt and related outgoings, we get a very different picture.
We could, of course, have a major debate about the issue of rent certainty or rent control, but that might be for another day. Somebody mentioned Irish Nationwide Building Society. In a previous life I practised law and when I first started doing conveyancing as a solicitor, dealing with banks and building societies was a very different scenario from how it was subsequently in the latter part of the 1990s and into the 2000s. Somebody virtually had to have their communion money with a building society for 15 or 20 years in order to be able to make an application for a loan. Deputy Mathews made the point that life did not begin and end in 1995 or 1996. There was an entirely different banking system back then that was far from throwing money at people. One practically had to take a secret vow down in some hidden chamber in order to be able to access finance.
One of the issues about mortgage insurance was that there was a product, not exactly the same kind of product as we have been discussing, on the market in those days. It was aimed at people who did not have a permanent and pensionable job but were on a contract with, say, for the sake of argument, RTE - a job most of us would regard as reasonably good but that did not hit all the buttons of permanent, pensionable, guaranteed for life and so on - and it was a type of insurance people could take out on their incomes. The point was raised that people now have very insecure positions. Many people are on contract employment and are not in full-time permanent and pensionable jobs. Is that going to be a major issue for us when we start talking about lending? Is there room for a product that can get people over the hump of not having the permanent and pensionable job to some extent?
Mr. Brendan Burgess:
I do not think there was a product at any stage for contract employees. They sell payment protection insurance to people who have permanent jobs. If one applies for a mortgage and one is in a contract, they probably will not give one a mortgage. That was one of the big problems with the payment protection insurance scandal. People were sold insurance they could never claim because they did not meet the criteria. I do not think there was a product on the market----
Mr. Karl Deeter:
They have problems getting credit anyway, but the interesting thing is that section 126 of the Consumer Credit Act governs the provision of life cover on loans. Obviously there are ways to waive that. There are certain conditions - one can be over a certain age, have been loaded, have been refused, be buying an investment property, etc., but we actually put in mandatory insurance for the event that is probably least likely to happen. I have always wondered about that, when other events, such as a period of unemployment, are far more likely to happen. If those involved in the activity should be paying for the indemnity, as is generally the principle in indemnity - one must have privity or some kind of interaction with what is occurring - a scheme where anyone who takes any mortgage pays a certain percentage or a certain amount of payment towards a general pool of insurance, something like that could work very well. It would help people that it would be paid if they entered into the mortgage arrears resolution process. It would encourage them to deal with the bank and not hide from the bank. The incentives would be much better aligned to provide for the risks they really face, rather than forcing insurance for the thing that is least likely to happen and which, because it is not built into the payment, the person can actually cancel in most cases. There are people in arrears who cancel their insurance and then they die and the mortgage is still there.
Mr. Paul Joyce:
It is correct. The only obligatory insurance is life cover under the terms of section 126, but as Mr. Deeter said and as I said earlier, many of those policies have lapsed, because people are in arrears. It is obligatory because often the borrowers are joint borrowers. The death of one party is a final event, and the cover is there to pay off the principal for the remaining spouse and, often, children. Therefore, it might be seen as an essential insurance. Redundancy protection policies have been in place, as well as policies for critical illness, and so on. As I understand it, the premiums are quite high and there has been a fair degree of mis-selling. For example, people on fixed-term contracts were sold policies that only apply to people in permanent employment. Very little checking went on at the time. People were sold critical illness cover only to find that the illness they suddenly develop is not on the defined list of illnesses under the policy, and so on. Reference was made earlier to the true cost of the mortgage, the energy costs and so on. One must also factor in the various types of insurance one might take out - life cover and so on. If one adds in another element of a mortgage insurance scheme, which is taken out in the lender's name, but effectively must be funded by the borrower, affordability becomes more of an issue.
Mr. Karl Deeter:
The idea behind building a slight replacement into the cost of the mortgage is that if an event occurred that made a person unable to pay, this other insurance would be paying that mortgage, so it would continue to perform like a regular mortgage, rather than going into arrears. Often when people die, the life cover does not actually cover the loan. We have this view that it wipes it out. In fact, one can often have big deficits. For example if one had an arrear, or if the interest rate applied on the insurance policy was 4% but over the life of the loan the actual interest rate was 5%, one does not match the other. Often borrowers go into arrears and it is the one time where someone with a ruined credit history is still mortgageable because one just shows a death certificate and that explains it away. There are many nuances to it, but there are better ways of doing all this stuff that do not involve lending caps or introducing mortgage insurance. All those things are external to sounder credit policy.
If the witnesses have any additional issues or thoughts around the issue of insurance and so forth that they wish to bring to the committee's attention, they may send them to us and we would be happy to receive them because we have been tasked by the Minister with considering these matters.
I missed some of the debate but I want to touch on a few issues. The witnesses were looking back over the period in terms of house prices going out of control and so forth. The 20% deposit is a very crude instrument in terms of the price of houses. In the Irish psyche there is an aspiration to own a home. We are different from other countries like Germany, in which there is a huge rental market. Property should not become the preserve of the rich, and I am nervous that will happen with this 20% deposit requirement. It means that is someone is buying a €200,000 home, they must come up with a €40,000 deposit. That is clearly excessive. At the same time there is negative equity at the moment. This has put young couples in particular in a terrible situation, because in many cases they ended up buying apartments and much smaller homes. They were told that property would appreciate in value and now they are stuck in many cases.
What is the sustainable model? This seems to be a very crude instrument. The proposed mortgage interest premium model, under which it will be covered by an insurance premium, means they will probably end up paying the same amount. That is certain. It is as though, if one is being covered by 10%, one is paying the full amount of the mortgage. How do we deal with supply issues? Dr. Lyons said it was about loan to value rather than income. I am not certain I agree with him on that, because a couple could, through no fault of their own, have had a peak in income. During the Celtic tiger they might have qualified for mortgages they should not have received - six or seven times earnings and the application done on the back of a shoebox. They might have bought a house. They might have had savings and been able to get a mortgage with a a loan to value ratio of 80% or 90%. Then suddenly their income drops and they cannot meet their mortgage. It is a crude instrument. It means the lender can move on them and sell the house, but it is a very financial instrument that works for the lender, but not the borrower.
I am asking the witnesses what instruments they would put in place to take account of supply. Mr. Deeter referred to this as well. How could we ensure people do not get into negative equity and can afford mortgage repayments on a sustainable basis? What we put in place now will probably only manifest itself in ten years time. What was put in place during the Celtic tiger and many places where people bought in 2002, 2003 and 2004 only manifested itself five or six years later when it crashed, or, at this stage, ten years later.
I do not think there is a balanced integrated discussion about how to deal with this. There are crude instruments, like the 20% limit, and there should be a way of putting in place a number of instruments to deal with supply, capacity to repay and loan-to-value ratio.
In the time available, the point I make is the need for a discussion on the model for housing, albeit a German-European model, which is that people will never own their homes. I do not think that is the model the Irish want.
Mr. Karl Deeter:
If one took a loan at 100% of the loan to value, everybody would say that it is, but I will give two examples where I bet people will disagree with that. A person in Dublin earning €50,000 a year, renting an expensive house who has two children, one of whom moves to Longford, what is wrong if he gets 100% of €40,000? What about people who come to us, such as consultants who have spent all their money on education but now they want to get a house.
The witnesses are missing my point. I believe that during the Celtic tiger era, with Ireland joining the euro system, interest rates came down overnight - effectively making excess credit available - and prices rose. In fact, at one stage, mortgage interest relief was taken away from rental properties and the price of property stabilised. The following year that instrument was reversed and the price of property rose. The instrument of bringing in a rule of 20% deposit for houses means that it has been decided that a significant section of the population will never aspire to own their homes. I do not believe that is correct. What instruments can be put in place to ensure that the price of property does not go out of control? I accept that one must have a level of savings but there must be other instruments.
Some of the reasons for the crisis are that the loan to value ratio went askew; the income to mortgage ratio went crazy with people earning €40,000 getting a mortgage of up to €300,000. That was not sustainable. What instruments could be introduced to deal with supply? Mr. Deeter referred to the role of planning regulations.
Mr. Karl Deeter:
One needs to increase the stress test. At present there is a Central Bank mandated stress test built into lending and that is part of the underwriting process. If one wants to make lending a little bit safer, one would not have to change the rules or bring in loan to value measures, became 90% is actually common. Even in places where they have insurance people are lending more than 90%. All it does is protect the banks. If one is looking for the best outcome for the individual and the institutions, they should take out insurance themselves. Let them insure their own activities, but if one increases the Central Bank mandated stress test that we already have from 2% to 3%, which is what the Hong Kong monetary authority did as well, one would de-risk the lending within the existing models, which are prudent good models. In terms of getting supply on board, unfortunately that is above our paygrade today. That is relative to housing supply and is a separate issue. In terms of macro prudential tools, there is nothing in that box that builds houses.
Dr. Ronan Lyons:
I do, indeed. In my original submission I gave this picture of the wealthiest and the least wealthy households. No matter what one does, if one picks a minimum deposit of 10% or 20%, one is effectively drawing a line and saying that at some point the people below the line will not be able to buy a property. The reason one would set the line at anything other than at the lowest point possible, is for the reason of financial stability, because of the families in negative equity. As soon as one puts it above the minimum possible, one needs to have a well thought out social housing strategy to provide long-term accommodation. That is not to say there are no other tools.
I think a deposit of 20% is the correct way to go, but not overnight. If one gave me a few pints and twisted my arm, I could be haggled down to 15% - a terrible way to decide macro prudential policy.
Dr. Ronan Lyons:
Let us take the Deputy's example of the couple not being able to afford a €40,000 deposit for a €200,000 home, the real trick for me is not to give them so much credit that they can afford the €200,000 home but to get the cost of that home in line with their incomes. What can they afford to save and how can we ensure that the value of that home is in line with their incomes? As Mr. Deeter says it is a discussion for another day. It is about auditing the cost of building unit.
I operated on a practical level in that world for many years. It is simple. If the house is overpriced, if the loan-to-value ratio is too high and-or the times earnings is too high, the risks are too high. If one is derisking the purchase of property down to 20%, one will get to a point where one takes out the risk of negative equity, however, I think people aspire to own their own homes. The question we have not addressed is the supply side. How can we get a system in place that the price of houses does not go out of control. We have lost control of our interest rates, the Central Bank does not have control over interest rates. We are talking about the crude instrument of 20% deposit, but I think there is more to the issue than that.
I am alerting everybody that I am drawing the discussion to a conclusion. We indicated that we would finish at 4.30 p.m. To the members who have waited, it would be acceptable if they, and I emphasise this, put "brief questions". If not, I will conclude after this round of responses.
Mr. Paul Joyce:
I think it would be a worthwhile exercise - I will not do it now - to see how a loan is underwritten. We talk about reckless lending, but I have not heard anybody discuss how these things come into creation. It is all in the underwriting. It is done from the top down, the bottom up and is stress tested. It is good lending. I am willing to show members how it works.
Mr. Karl Deeter:
If one wants to get a crude supply tool, just tax land. That should have been done. That was a significant oversight in the budget. One should tax land, sites and dereliction. Those are all things that allow people to carry unused potential housing and suffer none of the consequences.
Mr. Paul Joyce:
I think what Deputy O'Donnell is suggesting is that the 20% deposit and the three and a half times income, together constitute a significant impediment to many people getting mortgages.
The three and a half times income and the 20% deposit are both mitigated by a 15% variation on the lender's loan book.
Mr. Paul Joyce:
What one does not want is a situation where somebody - because, for example, they are living in expensive rented accommodation - cannot build up a 20% deposit, even if they are on quite high earnings. The Deputy described it as a crude rule, because that it was it is - it is a cut-off irrespective of the person and affordablity. A lot depends on one's capacity to service the mortgage. If one can demonstrate capacity to service the mortgage based on one's current earnings and likely future earnings - should one have to assemble a 20% deposit - it is a worthwhile question to ask. Right through the course of the discussion today I was certainly saying that this needs to be discussed in a lot more detail. We need a lot more information and housing data, which do not seem to have been thrown into this conservation at all. I suspect that nobody here has all the answers.
Dr. Ronan Lyons:
No, I gave my thoughts there. The only other measure that could be brought in - and it gets back to the Vice Chairman's point - is the building society model versus the bank model that was adopted. That is savings versus short-term debt, but the intermediate is the long-term debt. One would have basically switched people to fixed interest rates and given them security of repayment.
In the overall parameters, the two big banks each have total loan books of about €95 billion net of provisions in their overall lending. I am not talking about mortgage lending, but about their overall group lending. They are restricted from doing any seriously big expansion of lending of any type because they are still trying to correct the financial engineering of their balance sheets. This idea of restricting people getting access to mortgage loans is within that context. That should not be forgotten and it will be the context for the next two years.
I will give one last example. This is a concrete example of an apartment at the height of the boom in Dublin 2, which sold for €280,000. It was capable of being rented for €900 per month, which is €10,800 a year. At a multiple of 15 times, that is a valuation of €150,000 to €160,000.
I am just wondering about the land banks that were built up by developers - those that are still solvent. Is that in some way influencing the supply side of the market where they are now trying to recoup their costs from that time, so we are getting an inflated price for the houses they are going to build in the immediate future?
Dr. Ronan Lyons:
The major dysfunction in the land market has less to do with land banking and more to do with NAMA. NAMA sells land to the highest bidder, regardless of whether the bidder is going to build any properties on it. Thereby, once they have sold that at €2 million per acre in this area, that becomes the benchmark price. Anyone willing to build on it is prepared to pay an awful lot less. That is the ultimate dysfunction, as Mr. Deeter mentioned. The lack of a site value tax on all land is causing this speculation in the land market. Ultimately, the price of land is residual. It will just reflect whatever we are allowed to build on top of it, but in the NAMA model - the lack of a land value tax model - it is not quite that.
Mr. Karl Deeter:
As regards many people who have land, even if they have legacy permissions on it, with the introduction of part L, part M and then the part V contributions, it is not as if they are sitting on it and are thinking they have a great plan to take over the world one day. They just realise that their base cost, plus expense, plus construction gives them X cost that they have to cover. If the market is not there yet, that land sits idle so taxing it is a crude instrument as well if one looks at it in terms of fairness to what that person expected. However, taxing it and saying "Look, you can't just sit and wait this out until it comes to your perfect day when everything works out", is really the way that things need to go. It was an opportunity that was missed.
Do Mr. Joyce or Mr. Burgess want to add anything? If not, on behalf of the committee I would sincerely like to thank all the witnesses for participating in today's meeting and discussion. I also thank them for the material they supplied. I wish to reiterate our offer to receive any additional material they may wish to send to the committee. Unfortunately, I must emphasise that it should be sent in speedily because we are up against a time deadline.
As there is no other business, the meeting is now adjourned sine die.