John Gilroy (Labour) | Oireachtas source

I welcome the Minister of State, Deputy Ring, to the Chamber. It is great to see him again. I am pleased to have an opportunity to discuss this innovative legislation. It is always worthwhile spending time examining the approaches taken in other jurisdictions. I commend Senator Sean Barrett on affording us an opportunity to discuss this issue, even if I called down many maledictions on his head in recent days for presenting such complex legislation.

The Standing Orders of the Seanad work against us in respect of this legislation and it is regrettable we must discuss this highly technical Bill within the constraints of a Second Stage debate. I thank the Leader for taking time today to ascertain whether Standing Orders could be amended to allow us debate the Bill in an alternative format. We must deal with it in the prescribed manner, which means we are unable to interrogate the intentions of the proposer in as full a way as I would like. Notwithstanding this, we must do what we can within the constraints of Second Stage to examine this proposal, which has undoubted merit.

No one disagrees that restructuring of the mortgage market is necessary. The introduction of new mortgage products should be considered and welcomed if they are found to reduce the level of risk involved in all lending. Concerns have arisen about the drafting of certain sections of the Bill. These could be improved with further work as one or two sections appear to seek to achieve a little more than is legislatively possible. An example is the prescription for action following default or bankruptcy in relation to the ranking of creditors in section 24, which appears to be outside the scope and jurisdiction of the Bill. However, I will leave this matter aside until we are able to discuss it in a more appropriate manner, perhaps on Committee Stage.

One of the reasons I asked the Leader to ascertain if a different process was available for having this discussion in Private Members' time is that I believe the Government side could support the Bill if it were presented in another form. It is a great shame that we cannot allow the Bill to proceed in its current form as many aspects of it are worth exploring.

Some of the literature I have read on this issue suggests the financial culture in the jurisdiction in which the proposed bonds would be processed is very important for the successful operation of the bonds. The Danish model on which the proposal is based involves a conservative lending regime in a well-funded and mature financial market. As the Senator's note indicates, mortgage credit bonds have been operating successfully in Denmark for two centuries. A similar product in the United States, the mortgage backed security, is an instrument that represents a claim on cash flows from mortgage loans. We know now, however, that in the financial culture prevailing in the United States in the happy days before the collapse of Lehman Brothers, these instruments were bundled with more risky financial instruments and caused massive damage and contagion throughout the global market. Having seen how domestic lending institutions have operated over the years, people could be forgiven for lacking confidence in our lending leaders. I understand, however, that provision has been made within the operation of the mortgage credit bond to prevent over-the-counter resales and bundling with riskier products. I would liked to have had an opportunity to discuss this matter further with the Senator.

I have another concern about the operation of mortgage credit loans and associated bonds. It seems we are proposing that the lending institution - I will use the term "bank" for simplicity of argument - will act as a clearing house to match the loan given to the borrower to the bond of the lender. The bank charges an administrative charge, the borrower receives his or her money and the lender receives an income flow to the value of the bond. While I note that the balance principle works here, I would have also have liked an opportunity to tease out the implications of this with the Senator. My concern in this regard is that it breaks the traditional link between lender and borrower. It is customary for the bank to carry the lending risk and it is in its interest to act in a prudential manner with regard to due diligence because it is carrying the risk. Acting as a clearing house removes this responsibility from the bank or at least reduces the urgency of acting in such a manner. If the credit mortgage bond is available in the financial markets, over-the-counter resale would make this requirement or the urgency of this requirement less onerous on the banks.

Senator Barrett's proposal is exciting and stimulating and I would like to explore a number of other questions with him. For instance, would it be necessary to establish a new organisation as a specialised lender or would another, existing institution be retooled, so to speak, to assume this role in the Irish context? Is there a facility for early settlement of the bond and, if so, would this entail the bond carrying an increased risk premium?

I note section 6 sets out categories of property that would be eligible under the scheme. The non-profit or social housing element calls to mind our old friends, now deceased, in the United States, Fannie Mae and Freddie Mac. We saw where these two institutions ended up when they used a similar sounding financial instrument, despite enjoying the faith and confidence of the US Government.

Could we introduce this model in an oven-ready manner, as it were? Are there any distinctive Danish characteristics associated with this lending model or any unique or novel Irish characteristics which could preclude its smooth transfer into our system? I would have liked more time to discuss these issues.

The Minister indicated in his reply that a total shift in mortgage bank policy and regulation might be required to make it compatible with this Bill but contrary to what Senator MacSharry might say, the Minister's reply constitutes a result. He can take some satisfaction from the fact that it has not been dismissed like many of the proposals we may want to accept but are barred from doing so by the party Whip system. I say that because we must be honest in our dealings here.

I commend Senator Barrett. It is an interesting topic which I hope we will have an opportunity to discuss again in the House.