Mortgage rates could fall by 2pc under new scheme

The Central Bank

The Irish housing market is currently dysfunctional. We are facing a shortage of house stock in Dublin. Rising house prices and rents are increasing due to the lack of supply

Mortgage rates could fall by 2pc under new scheme –

One proposed solution would see us use a higher deposit requirement to force most first-time buyers out of the market. The difficulties faced by first-time buyers looking for a mortgage have left the construction sector unsure of demand which, in turn, makes funders of homebuilders nervous.JLT has been involved in mortgage risk around the world for 20 years. As a company that advises on a global basis, we believe that the solution to the problem is relatively simple.

We believe the current mechanism for regulating risk in the market and, in particular, the proposed mechanism that borrowers would have to have a 20pc deposit is too crude an instrument and will serve to exacerbate the problems which are already evident in the Irish market.

There is an alternative. Instead of reducing risk by restricting access to the market for first-time buyers you can choose to insure against the risk. The remedy as we see it is to introduce a mortgage indemnity guarantee scheme (MIG), which protects the banks against the risk of loss in the event of a fall in house prices.

There have been weaknesses in past structures. Our proposed structure ensures that our current MIG model provides a market solution which not only does not expose the taxpayer to risk but also provides a more stable housing market.

Our model is based on a spread of risk through insurers with strong financial ratings with full regulatory oversight.

Indeed, the Central Bank in its consultation paper has already stated that MIG could be a solution. The Central Bank suggested that people buying a house from a bank with a MIG in place could be exempted from the proposed 80pc loan-to-value restrictions. The bank’s principal concern is that such products be provided by highly-rated companies. JLT agrees. We would go further and suggest that MIGs should be provided not by one company but by a pool of companies, all of which have, at a minimum, an ‘A’ credit rating.

It is worth noting that under the current proposals for dealing with the issue of mortgage risk, namely the LTV restrictions, banks would be fully liable for 80pc of the value of a property. MIGs, if implemented as we are proposing, would see banks exposed only to 70pc of the value of a property.

Aside from providing greater risk cover to the banks and doing away with the need for first-time house buyers to have a 20pc deposit, 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. MIGs can operate as the Central Bank’s thermostat on the market.

JLT has held 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. Our experience is that in every other country where MIGs were introduced, they have served to facilitate credit flow to builders.

Under the system we are proposing there would be no cost to the State. The bill would go to the banks that would pay a once-off premium to insure against a fall in house prices of up to 30pc.

For example let’s say a new property costs €300,000. A 90pc loan would be €270,000. A MIG in that situation would cover up to €60,000 of a loss. Therefore that property would have had to fall from a value of €300,000 to €210,000 before that bank would be at risk. In this type of example an indicative cost to the bank would be €3,000, or €14 per month.

The cost is very affordable. Further the reduced risks for banks and the reduced capital requirement under Basel means that banks would be able to reduce interest rates.

So, MIGs, which have already been endorsed in principle by the Irish Central Bank, would provide a win-win solution to the market with long-term prudential control.

They would:

• Remove the need for first-time buyers to come up with onerous deposits and give them an opportunity to enter the house market.

• Reduce the risk to the Irish economy of an overheated property market.

• Give the Central Bank an effective tool to restrict or promote access to the market thereby reducing the risk to banks operating in the Irish mortgage market.

• Allow banks to pass on the savings, which come from reduced risk to customers. If 100pc of the saving were passed on directly we believe the average mortgage rate in the Irish market could fall by up to 2pc.

• Provide a greater certainty of loan availability to the market and immediately provide a boost to builders, particularly those building for the new-home and rental markets.

• No cost to the Exchequer. All costs would be borne by the market itself.

MIGs provide a simple approach to get the house-building market moving under prudential control