Sean Barrett (Independent) | Oireachtas source

We are also pointing out the advantages the proposed measures would have in terms of reviving the housing market and divorcing house purchase from financial speculation. These became far too entangled in Ireland, which got us into the situation we are now trying to rectify. The Danish system, referred to as nykredit, dates back to 1797 and is very robust due to extensive regulation that spreads outside the mortgage credit market to the wider banking sector. Bubbles are not a feature of the mortgage market under this system and, indeed, that was the original purpose.

Strict loan-to-value ratios are an important feature of our Bill and it is a pity we did not have them here through most of the last decade. Such ratios ensure much lower rates of default. There are variations in the ratios used, with an 80% loan-to-value ratio for residences and a 70% ratio for agricultural holdings. Social housing and other types of property could also be included, which makes it possible to use the future flow of rents from local authority housing - or, indeed, any other public building that has an income flow - as security for loans. This has worked well in Denmark. Danish bonds are desirable and are rated typically either triple A or triple A plus. This low-risk profile is due to that country's strict loan-to-value requirements and the low default rate, to which I referred earlier.

We must find a way to separate the cycles of causation, with the Irish banking sector infecting the sovereign and vice versa. Under this proposed system, the market would be of the view that, pending a solution to our public finance problems, there is a better chance that an Irish person will repay his or her mortgage than there is of us fixing our public finances or of the banks sorting themselves out. Therefore, it would be to the advantage of the person seeking to become a home owner to have this system in place and to be divorced from what is happening in banking and the public finances.

This structure is not part of the opaque securitisation process that became infamous with the US sub-prime mortgage crisis. It is therefore not attached to a waterfall payment profile with various tranches of payment and risk profiles. These bonds are transparent and easy to rate and analyse for risk, which makes them very safe and of low yield. In fact, I suggested to a colleague earlier that if there was a fear that this could lead to a repeat of the US sub-prime situation, we might invite the Danes to do it first, given their experience going back over several centuries. In order for the system to work, we would have to improve the registration of title, deeds and valuations system, which is actually being done now as part of the process of introducing a property tax. We must also do away with letters of comfort, falsification of documents and so forth.

This system may have been studied in the past, according to some former officials, now in academia, whom I spoke to after this Bill was published. There are papers somewhere in the realms of Government that I did not know about in which this system was considered. Those papers would be well worth examining to determine whether we can make the breakthrough here. The bankruptcy procedures might be made slightly more complicated with these proposed mortgages but that can be handled.

The Central Bank would have a major role to play as the licensing authority. The system encompasses checks and balances that obviously were not in place in the past and would be part of a wider programme of reform of financial institutions, directed at transforming the Irish financial system and putting in place a macro-prudential system of finance, as advocated by the Central Bank. The Danish system has been endorsed by the IMF, the Bank for International Settlements and the Organisation for Economic Co-operation and Development, and is part of the Basel III banking reforms. Many economic commentators have argued that the system is desirable due to its stability. The legislation as written is also compliant with Directive 2006/48/EC of the European Parliament and Council of 14 June 2006, relating to the taking up and pursuit of the business of credit institutions, as published on page 1 of the Official Journal of the European Union, L177.

In the Financial Times of 16 October, Martin Wolf wrote:

It is no secret why growth is slowing in high-income countries; this is due to fiscal tightening, weak financial systems and powerful uncertainty. This toxic combination is particularly threatening inside the eurozone...

We are trying to deal with those problems here and I hope this Bill will assist the Government in that endeavour. I commend the Bill to the Minister and the House.