Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I thank the Senator for his work in researching and bringing this Bill before the Seanad today. It is clear that there are many challenges currently facing the Irish banking system and I welcome all contributions to the debate, particularly from the Senator, given his expertise in the economic field. Mortgage credit is a key component of the banking system and we accept that the market is sub-optimal at the moment. I regret I cannot accept the Bill as proposed by the Senator in its totality but I have asked my officials to consider whether elements of the proposal could be feasibly rolled out as the financial system is returned to sustainable operation.

As the Senator has acknowledged, this Bill borrows heavily from the Danish model which has operated successfully in Denmark for generations. The balance principle of matching loans and bonds is the backbone of the Danish mortgage system. Within the system, the mortgage banks there operate differently from mortgage lenders in Ireland. They do not take deposits or raise funding for lending purposes. Instead, they act as an intermediary between the borrower and the investor who funds the loans by purchasing bonds.

It is far from clear that the Danish system could be transposed to the Irish situation. We must remember that, until the global banking crisis broke in 2007, mortgages in Ireland were funded through a variety of sources. These included customer deposits and unsecured funding from the money markets of both short and long duration, as well as secured funding structures such as mortgage-backed securities and covered bonds. However, as is widely understood today - albeit with the benefit of hindsight - as the last decade wore on and banks developed an insatiable appetite for funding to support their expanding loan books, more and more Irish mortgages were effectively being funded by the international markets.

As part of the restructuring of our banking system, we are downsizing our institutions to a more sustainable level and also restoring a more traditional funding model that largely comprises customer deposits, which do not tend to move frequently. Significant progress in aligning the quantum of bank lending with customer deposits has already been made. However, that is not to say there is no place for market or wholesale funding in the Irish banking system. We do recognise the benefits provided by this type of funding, particularly as banks seek to better align the long-term nature of their lending with that of their funding, which tends to be more short term. It is for that reason the Government is supportive of the covered bond structure we have in place in this country, which has been proven by international investors to be a robust and valued framework.

As Senators can appreciate, since the Government has taken office, much effort and focus and substantial taxpayer resources have been directed towards the stabilisation of a badly damaged banking system. Any proposal for the introduction of new initiatives needs to be viewed through the lens of the State support already committed and broader sectoral financial stability. The Danish covered bond model has been in place for more than 200 years and is specific to the Danish property market. It is a concept that has worked well in the Danish context and is well embedded in Denmark. There are many positives to the system but it must be remembered that the introduction of such a system in this country would necessitate a total shift in mortgage banking policy and regulation. Such a transformation would bring with it a number of risks and could conflict with other Government initiatives currently under way.

For example, the Central Bank's code of conduct on mortgage arrears applies to mortgage lending activities with borrowers in respect of their principal private residences in the State. Compliance with the code is mandatory for all mortgage lenders registered with the Central Bank. The code provides a number of protections to borrowers. These include the establishment of a formal mortgage arrears resolution process, MARP, to deal with mortgage customers who are in arrears or pre-arrears, the establishment of a dedicated appeals support unit and a separate internal appeals process by lenders to deal with individuals on a case-by-case basis. Provision 9 of the code restricts lenders from imposing charges or surcharge interest on arrears outstanding in MARP cases. With regard to repossessions, a lender may not apply to the courts to commence legal action for repossession of property until every reasonable effort has been made to agree an alternative arrangement. When a borrower is co-operating with a lender, the lender must wait at least 12 months from the date the borrower is classified by the lender as being under its mortgage arrears resolution process - that is, 31 days from when arrears first arose - before applying to the courts to start legal action for repossession. This contrasts greatly with the Danish system, where it typically takes no more than six months from the time when the borrower defaults until a forced sale can be carried through. The Government could not countenance a system that forced families out of their homes in such a short period of time. The Government's proposals for dealing with the mortgage arrears problems have been designed to assist people to stay in their homes for as long as they are proportionate to their needs.

In addition, the Bill, together with necessary and detailed Central Bank regulations, could conflict with the personal insolvency legislation which will deal with borrower indebtedness and with the deleveraging process that is under way in the banks. The Danish model and the Bill proposed by the Senator involve the standardisation of mortgage products, most notably with regard to loan-to-value, LTV, limits. Danish regulations and the proposed Bill limit the amount that can be lent to homeowners to 80% LTV. Although this helps in terms of credit risk for the bank and negative equity risk for the borrower, it would greatly limit the number of mortgages issued in Ireland. Most banks in this country currently offer mortgages of 92% LTV. This is important to many potential borrowers, especially the important first-time buyers, who would struggle to find the additional 12% for a deposit.

In addition, the capital requirements directive and regulation is currently in the trilogue phase of negotiations among the European Commission, the Council of the European Union and the European Parliament.

It would not be appropriate to introduce new lending and banking practices in advance of the conclusion of negotiations on this regulation and directive. Concerns have been expressed about how the directive may treat bonds such as those used in the Danish system. The outcome of the negotiations has the potential to require significant change to that system. Finally and crucially, for this system to work, it would need to generate a critical mass and would need legal certainty. It is not clear that there would be sufficient interest in the purchase of Irish mortgage bonds at this time.

The Government is playing its part in returning the property and mortgage market to normal levels although I wish to make it clear that the Government will not artificially stimulate demand. Last year's budget aimed to restore confidence, rebuild our economy and provide stability and certainty to investors to invest in Ireland. It provided that first-time buyers in 2012 will get mortgage interest relief at a rate of 25% and other buyers will benefit from relief at 15% This measure gives certainty to those considering purchasing a home. Again, I strongly emphasise that this mortgage interest relief measure will come to an end at the end of this year and there will be no extension to this measure given the current budgetary position. Furthermore, purchasers should ensure they factor in the time required between purchase and mortgage draw-down in order to qualify for mortgage interest relief. We are getting really close to the time when the curtain comes down on this relief.

The recently launched residential property prices register also gives certainty to the market in regard to prices paid for specific properties and it is already helping to guide commentators about the current state of the market. The budget also introduced a capital gains tax incentive for property purchased between 7 December 2011 and the end of 2013. If a property is bought during this period and held for at least seven years, the gain attributable to that seven year holding period will be relieved from capital gains tax. This applies to commercial property, including industrial and commercial buildings, farmland and residential property.

A number of further initiatives have been pushed forward. The Government is aware of the significant difficulties some homeowners are facing in meeting their mortgage obligations and is committed to advancing appropriate measures to assist those mortgage holders who are experiencing genuine difficulties. In this regard, the Government is actively implementing the main recommendations contained in the report of the interdepartmental working group on mortgage arrears,

A number of significant milestones have now been achieved. The Personal Insolvency Bill was approved by Government and published last June and Committee stage of the Bill was passed by the Dáil last month. The Minister of State with responsibility for housing and planning has formally launched the mortgage to rent scheme on a nationwide basis. Lenders have now provided details to the Central Bank on their proposed forbearance and loan modification options and some forbearance measures have been introduced on a pilot basis, with a further roll-out later in the year. In addition, an extensive independent mortgage advice framework has now been put in place by the Minister of Social Protection comprising: an enhanced website, keepingyourhome.ie: a mortgage arrears information helpline; and the provision of free, independent, one-to-one, professional financial advice to borrowers considering a long-term forbearance or resolution offer from their lender. The list of accountants providing this service is located on the keepingyourhome.iewebsite. The Government remains very committed to progressing these measures, which are in addition to existing supports such as the code of conduct on mortgage arrears which assists genuine mortgage holders in difficulty, and the Government sub-committee on mortgage arrears, chaired by An Taoiseach, which continues to meet to ensure this matter receives priority attention across relevant Departments and agencies.

I note that the comments of the Secretary General of the Department of Finance, Mr. John Moran, and the Central Bank's director of credit institutions and insurance supervision, Ms Fiona Muldoon, have generated significant coverage. These two public servants were doing exactly what public servants do - clearly articulating and implementing the Government's policy on the resolution of mortgage arrears.

It is important to remember there is no quick-fix solution to the Irish banking and mortgage issues. The Danish model is about a different financial and institutional system of mortgages and lending. Adopting such a system in Ireland would involve many risks and now is not the right time to include further risks into the Irish financial system. While accepting the many merits of the Bill proposed by Senator Barrett, I consider that the direction being taken by the Government is appropriate at this time and I am satisfied that the initiatives currently underway will resolve the situation. I fully accept many of the principles behind the Bill and the spirit in which it is put forward but regret that we cannot accept it at this time. However, I reiterate that I have asked my officials to see if proposals within the Bill can be advanced over time as the financial system moves to a more sustainable level.