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Central Bank Of Ireland Outlines Proposals To Restrict Mortgage Lending

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Press release from Central Bank of Ireland. The introduction of these measures was signalled last night in a speech by Governor Patrick Honohan.

http://www.centralbank.ie/press-area/press-releases%5CPages%5CCentralBankpublishesnewmacro-prudentialmeasuresformortgagelending.aspx

The Central Bank of Ireland today published Consultation Paper 87 with proposals to introduce new macro-prudential measures to enhance the resilience of the banking sector and households to housing market developments. The measures place restrictions on the loan to value (LTV) and loan to income (LTI) ratios lenders can apply when lending for house purchase and will apply to all lending in Ireland by regulated firms. The measures introduce proportionate limits and specific exemptions which take into consideration that there are some cases which could fall outside strict limits.

Deputy Governor, Stefan Gerlach, said, ‘The primary objective of these measures is to increase the resilience of the banking and household sectors to the property market. In Ireland we are still experiencing the destabilising effects of a property bubble. Our research has shown there is strong evidence that mortgage losses are much higher where borrowers have a high LTV or LTI rate. We believe that measures such as these are a standard part of a well regulated financial system and introducing these precautionary measures should contribute to a stable and well-functioning mortgage lending market.’

Deputy Governor, Cyril Roux, added, ‘These measures have been carefully considered and, taking past experience into account, are being introduced at an appropriate time to ensure borrowers and lenders can withstand potential economic or property market shocks in the future without financial distress. These measures are not intended to replace lenders’ own risk management practices, but rather they should reinforce and strengthen the existing risk mitigation practices used to ensure prudent lending.

‘As it can be assumed that a regime of the type foreshadowed in the consultation is likely to be introduced, we expect lenders not to accelerate high LTV or LTI loan approvals in advance. We will continue our close supervision of lenders and have set out clear monitoring requirements which will apply.’

The measures set out are:

  • Restrict new lending for principal dwelling houses (PDH) above 80 per cent LTV to no more than 15 per cent of the value of all new PDH loans;
  • Restrict new lending for PDHs above 3.5 times LTI to no more than 20 per cent of the value of all new PDH loans; and
  • Restrict new lending to buy-to-let above 70 per cent LTV to no more than 10 per cent of the value of all housing loans for investment purposes.

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Interesting there are no hard limits to LTI ratios, just a certain fraction that must be inside a certain limit. Maybe there is a case for some flexibility to take account of differing and unusual circumstances, but the 15% above 4.5 times income over here is plain window dressing.

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Interesting there are no hard limits to LTI ratios, just a certain fraction that must be inside a certain limit. Maybe there is a case for some flexibility to take account of differing and unusual circumstances, but the 15% above 4.5 times income over here is plain window dressing.

Yes, the Irish proposals make the FPC's measures seem soft in comparison. Their LTI restriction would probably kill the market over here.

Incidentally, from reading the policy paper it appears they may well be adding debt-to-income (DTI) limits once the bank's new Central Credit Register is operational in early 2016.

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Interesting there are no hard limits to LTI ratios, just a certain fraction that must be inside a certain limit. Maybe there is a case for some flexibility to take account of differing and unusual circumstances, but the 15% above 4.5 times income over here is plain window dressing.

It's Central Banks trying to make Mortgage Backed Securities look more attractive. "We are stopping bankers from doing reckless lending blah blah blah, so MBS are going to be safe for investors this time...."

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Interesting perspective on BTL from the Irish CB (my bold):

"The proposed measures will require banks to restrict lending for primary dwelling purchase above 80 per cent LTV to no more than 15 per cent of the aggregate value of the flow of all housing loans for principal dwelling home purposes; and to restrict lending for primary dwelling purchase above 3.5 times LTI to no more than 20 per cent of that aggregate value. Such thresholds would ensure a greater degree of safety around the mortgage business. Lending to households for the purpose of purchasing investment properties calls for greater prudence. The paper proposes a lower threshold for buy-to-let (BTL) properties, requiring banks to limit BTL loans above 70 per cent LTV to 10 per cent of all BTL loans."

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Yes, the Irish proposals make the FPC's measures seem soft in comparison. Their LTI restriction would probably kill the market over here.

Incidentally, from reading the policy paper it appears they may well be adding debt-to-income (DTI) limits once the bank's new Central Credit Register is operational in early 2016.

Does the difference in wording indicate that all debt must be considered so that, for instance, a BTLer would have to keep their total debt on both their own home and their rental properties inside debt-to-income limits?

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Does the difference in wording indicate that all debt must be considered so that, for instance, a BTLer would have to keep their total debt on both their own home and their rental properties inside debt-to-income limits?

They identify a weakness in the proposed restrictions, namely that a capped mortgage may not prevent a household taking out additional loans (secured and unsecured) and ultimately becoming over-indebted.

Limiting a borrower's total debt from all sources to a ratio of income would help mitigate this, but for such a ratio to be calculated all debts of the borrower need to be assessed by the mortgage lender. At present in Ireland this isn't easy, but the Bank is compiling a central Credit Register to facilitate it (the legislation to do this has now been put in place).

A borrower seeking a BTL loan would presumably be tested against the DTI limit, with any existing OO or BTL loans taken into account. However, the paper indicates that at least some of the potential rental income from the property might be included in the calculation of the borrower's income.

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They identify a weakness in the proposed restrictions, namely that a capped mortgage may not prevent a household taking out additional loans (secured and unsecured) and ultimately becoming over-indebted.

Limiting a borrower's total debt from all sources to a ratio of income would help mitigate this, but for such a ratio to be calculated all debts of the borrower need to be assessed by the mortgage lender. At present in Ireland this isn't easy, but the Bank is compiling a central Credit Register to facilitate it (the legislation to do this has now been put in place).

A borrower seeking a BTL loan would presumably be tested against the DTI limit, with any existing OO or BTL loans taken into account. However, the paper indicates that at least some of the potential rental income from the property might be included in the calculation of the borrower's income.

Sounds exceedingly sensible, I hope the BoE pick up on the idea.

I'm not surprised that rental income counts towards borrower's income, my thoughts were more that even when this is taken into account a sizeable number of British BTLers would lack the income to support their debt profile at any reasonable debt to income multiple. It will be interesting to see whether this is also the case in Ireland, or whether such positions have already been wiped out by their crash.

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