Finance Committee – Mortgage Insurance Scheme 27.11.14

Mortgage Insurance Schemes: Discussion (Continued)

Thursday, 27 November 2014

Joint Committee on Finance, Public Expenditure and Reform Debate

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(Speaker Continuing)

[Mr. Angel Mas:] That is why we believe the correct regime for Ireland would not be so much based on ratings but subject to Central Bank scrutiny and approval on the basis of who is the underwriting entity, what capital it has, what claims payment ability it has. In our case in Europe, we do not have debt. Any rating is associated with debt payment capabilities is technically from a rating perspective correct but wrong from the standpoint of assessing the certainty of payment for our insurance.

Senator Sean D. Barrett: Information on Sean D. Barrett Zoom on Sean D. Barrett On 6 November, Genworth’s share price plunged 38% and Standard & Poor’s downgraded the rating from BB+ to BBB- due to concerns with earnings volatility and overall risk position. Bailing out insurance companies is second in unpopularity only to doing the same for banks.

The evidence from other countries such as Denmark and Canada supports the 20% mortgage deposit rule. Will the delegation explain in more detail why it believes the risk of reducing this from 20% to 10% can be insured for the amounts described but not for 0%?

Mr. Simon Crone: We would advocate that there should always be some borrower deposit. It should be driven by a borrower’s ability and willingness to pay. There should always be strong calculations about affordability and prudency. Willingness to pay is driven by what we say colloquially of having some skin in the game. We always believe a borrower should have some form of down payment for a mortgage loan and it should not go beyond a 95% limit. There should always be at least 5% that the borrower is investing in the property purchase.

Mr. Stephen Rance: Senator Barrett spoke about deeper protection within the loan. If the insurer covers 20%, 40% or the entire loan, there is an economic equation that relates to the capital relief. As I understand it, the deeper the cover, the better the capital relief. Consequently, if that capital relief is better, then there may be more ability from the lender to pay a premium commensurate with that sort of risk. It probably does not wholeheartedly answer the Senator’s question but it shows there is some mechanism to make something like that work.

Senator Sean D. Barrett: Information on Sean D. Barrett Zoom on Sean D. Barrett Would a higher premium be required for the person putting down a deposit of 5% rather than 10%? Does the risk curve go up?

Mr. Stephen Rance: The risk curve goes up the lower the deposit.

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry I thank the delegation for a very informative meeting. I am one of those who believes lending without equity is reckless. Having 5% skin in the game is very low. We are talking about prices being elevated but I am not sure that is the way we want to go.

Who represents the person who pays the premium, namely the customer? Is there a representative body there? Every time I pay for something, I expect that I can represent myself and negotiate on it. If an insurer decides to pay out on a split mortgage, who deals with the customer? Does the insurance company come back to re-insure?

Is the maximum payment going to be €20,000? Does that change? The banks benefit from having this insurance in place. There has been sharp practice in banking and insurance in the past. People do not rightfully trust this area and trust in it needs to be won back. Should there not be full transparency? I like the idea of having separate billing for this mortgage insurance product. I would also like to see a separate assessment showing the banks’ benefit for this being in place. Essentially, a positive and a negative will be written down on the same statement.

What level of due diligence do the insurance companies seek to ensure the value of the mortgage is correct? What is done to ensure someone is not giving a false value? That practice was shocking here. It is not the insurance companies’ fault that people put on suits, calling themselves auctioneers and gave prices for property for which people could not pay ultimately. What is in place to ensure this does not re-occur?

What is the view on regional caps? There is a different property dynamic in Dublin than there is in Cork, our second city. Property values in Cork are still under 50% of what they were in the boom. Rents a few years ago would have been €1,000 a month but are only just coming back in at €900. Cork is not even at the races, so to speak. With these two parallel markets, is a regional cap required?

We need to get first-time buyers moving. For example, when combine harvesters are sold, up to six transactions could be involved. The little guy has to move on for the next guy to move on.

Is there the expertise and, more importantly, the culture in the banks to work with insurers? It is culture that counts. If someone comes into this with the wrong attitude, we will be screwed again. Would the insurers’ attitude to a State-owned bank be different?

Chairman: Information on Liam Twomey Zoom on Liam Twomey Could the Deputy get rid of his telephone as it is interrupting the proceedings?

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry Would these insurers take into account details such as age and health when considering mortgage insurance or is it a flat basis?


Mortgage Insurance Schemes: Discussion (Continued)

Thursday, 27 November 2014

Joint Committee on Finance, Public Expenditure and Reform Debate

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Vice Chairman: Information on Aideen Hayden Zoom on Aideen Hayden Irrespective of whether Mr. Deeter has to leave the meeting I must move on.

Mr. Karl Deeter: I enjoyed the exchange and I thank the committee members.

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry I thank the delegation for a very interesting conversation. I apologise to Mr. Burgess for missing his contribution. Being from Cork and being a landlord – for my sins – we do not have the same issue as is being experienced in Dublin but that is not to say that it may not happen. The situation now might have come about for different reasons. In the past it may have been caused by profit-taking by people who were buying and selling and there was an element of frenzy in the market. Dublin now has high employment levels and highly-paid employment and people want to live close to their work. Therefore, they are prepared to pay that bit extra and they can afford to do so but this is creating pressure on everyone else and especially those in the social realm. Mr. Burgess has referred to rents of €1,500 a month in Dublin, but rents in Cork which had been €1,000 a month for a typical two-bedroom apartment, dropped to €750 a month and have risen to €900 a month and the value of the properties are still only about 45% of their previous value. We are nowhere near.

We should speak about the categories of those for whom we need to provide housing. For example, the garda and the nurse couple are looking for a house but other different members of society are also looking for housing. A councillor in Cork recently recommended that a person should have at least two or three children in order to get on the housing list. I am not making any judgments but it is something we need to take into account. There are a high number of family break-ups which in many cases result in a requirement for two houses for a family in that a parent living alone will need to provide accommodation for the visiting children. Demand is building from a variety of sectors. It is difficult to provide the correct balance when framing legislation. Sometimes when one speaks about this situation one is accused of being cold-hearted with regard to very difficult human circumstances.

Many landlords, including myself, would prefer not be landlords – we would love to be able to disappear out of that sector. We came in during the high times and we are losing money every week, month and year. We have borne the brunt to date and there is talk now of caps on rent. That is the other side of the argument. Now would be a nice time to be coming into the market. However, that group of investors are still there and those who are paying their way are still being punished for their bad decisions.

The cost of building a home in Cork and Kerry and other parts of the country is still greater than the cost of purchasing a house. While our conversation is important in the context of Dublin we need to distinguish the regions. It could be that the answers for the Dublin situation may also be the answers for Cork and the rest of the country in the future as things lift. We need to discuss the type of housing we need. I do not agree that everybody in Dublin needs a three-bedroom semi. We should have considered building proper high rise buildings. The only reason we built three-storey houses was in order to squeeze more rooms into a lower footprint but a three-storey house is impractical for family living. We then built progressively smaller apartments and because the owners could not sell them they are finding them impractical accommodation for raising a family. It may be necessary to build high-rise buildings in the Dublin area unless we want to have people travelling long distances from outside the city. A significant conversation is needed in this regard.

It was not so long ago that ghost estates were the topic of conversation. People were house-hopping; they would rent a house and then move on to a nicer, newer house. This hopping was at a severe cost to the landlords.

There is a sizeable problem of anti-social behaviour in many estates – although this is not particularly confined to social housing. Landlords have to deal regularly with this behaviour. Certain tenants can make life miserable for everyone else. There are no mechanisms for dealing with people who are not behaving as is appropriate in a community situation. I ask for the views of the delegates on those points.

Mr. Brendan Burgess: On the difference between Cork and Dublin, one of the issues with mortgage indemnity insurance is that the insurance companies will probably not provide it in areas where they consider the price is too high. I gather they are not providing it in London at the moment because the prices are too high. They probably look at Cork and decide to give mortgage indemnity insurance in Cork because they decide the chances of a claim are much lower. They tailor their product on a regional basis.

I was not fully sure what point the Deputy was making. Is he saying that if the Central Bank immediately introduced an 80% maximum loan that the average family unit in Cork – a couple in their late 20s or early 30s – would, with prudent saving, save up to 20% of a deposit—–

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry That is correct.

Mr. Brendan Burgess: —–and would not be affected by that rule?

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry Not as much because what they are being asked to fund is quite low – it depends on what job they have. Auctioneers in Cork say that people are managing to cobble that money together pretty much. In the Kerry region an average house would cost less than €100,000 and in Cork, €150,000 is still a lot of money. It is not like in Dublin where prices seem to be moving at a different rate entirely.

Mr. Brendan Burgess: It is probably easier in Cork to get in at the level one wants because people can move outside the city and still be able to commute whereas in Dublin a person might have to go to Gorey to get within his or her price level.

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry I often stay out at Newlands Cross and it takes me nearly one and a half hours to get in here. It is a completely different world here than in the rest of the country.

Mr. Brendan Burgess: Most of the opposition has been to the proposal for the 80% LTV. In many cases it will not be a problem for people.

Deputy Tom BarryInformation on Tom Barry Zoom on Tom Barry Yes but the challenge here is to look at the housing stock and what type of housing stock we want for Dublin. Even though people do not like the look of high-rise buildings, a suitable high-rise means that people can actually get to work quicker. I am one of the people who spends three hours going up and down the road and it is just such a waste of time.

Vice Chairman: Information on Aideen Hayden Zoom on Aideen Hayden Dr. Ronan Lyons wishes to contribute on that point.

Dr. Ronan Lyons: I agree with the gist of much of what the Deputy is saying. If we take the income of a couple – the classic garda and nurse pairing – for example, their income does not vary at all from one area of the country to another as they are on public sector pay scales. For a family with €50,000 a year in gross income, to be sustainable, a house can cost no more, including land and everything, than €150,000. One can buy a house for less than that in many parts of the country but if it is not possible to build for that price – we will run into a problem in the future because of the increase in population. It is certain it is not possible to build for anything like that in Dublin. The image of renting for a certain generation is that of the bed-sit, a room in an old house; for the next generation it means paper-thin walls in an apartment built in the 1990s, somewhere along the quays. However, people in other countries live in rented accommodation for all their lives. In that case, they are good quality units in which anyone would wish to live. There are such actors in the Irish market now but unfortunately it is limited by the high cost and certain oddities relating to the minimum specification about lifts and stairwells and orientation and car parking spaces.

Vice Chairman: Information on Aideen Hayden Zoom on Aideen Hayden I am conscious that we are running out of time.

Dr. Ronan Lyons: I have concluded.

Vice Chairman: Information on Aideen Hayden Zoom on Aideen Hayden I invite Mr. Paul Joyce to make some points

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(Speaker Continuing)

[Deputy Tom BarryInformation on Deputy Tom Barry Zoom on Deputy Tom BarryI have about ten questions in all for the delegates and they might do their best to respond to them.

Chairman: Information on Liam Twomey Zoom on Liam Twomey They will have to work their way through them.

Mr. Michael Bennett: I will try to answer some of them and leave some for the other participants.

Chairman: Information on Liam Twomey Zoom on Liam Twomey You are allowed to skip a few.

Mr. Michael Bennett: Okay. Mortgage insurance would be a contractual relationship between the lender and the insurer and the loan agreement is a contractual relationship between the lender and the borrower. To the extent that there are disclosures of information in respect of costs and illustrations one might see in other insurance products, that would be an issue for the regulator. I do not think we as an insurer who is now a party to the agreement could dictate it.

In respect of due diligence, most insurers operate under a delegated underwriting authority but perform periodic evaluations and loan file audits to assess underwriting criteria, including the accuracy of appraisal values. My experience is that for high LTV lending, a full appraisal whereby an appraiser visits the property, rather than a drive by appraisal or a view of comparable properties on a website, would be the most appropriate. We would be happy to provide coverage to State banks. In terms of the pricing and whether it varies by loan attributes, it does not vary by health and that is not a criterion this is considered by even the lenders. They consider the sustainability of income and affordability. In terms of age, the only caveat I would add is that the borrower must be have sufficient income for the term of the mortgage. Therefore, there is usually is a limitation on lending into retirement but there is not a differentiation between someone who is aged 35 and someone who is aged 40, apart from their being able to sustain the mortgage for its term.

Mr. Angel Mas: I will respond to Deputy Barry‘s point on first-time buyers and the impact a cap would have and my colleagues can respond to some of the other points he raised. There will be a little fewer than 10,000 first-time buyer mortgages in Ireland this year, which will be high loan to value which is typical for first-time buyers. At the peak of the market there were more or less 37,000. If the normal level could be half the number at the peak, and I am speculating on this, let us say it would be 20,000 mortgages, that would mean that if it is 50% in terms of first-time buyers, it would be 40,000 total mortgages. If a cap of 15% is imposed, 14,000 families would be excluded from home ownership because they would not have the high loan to value mortgage they require. Even if applied to today’s levels, that would mean that 6,000 of the mortgages that were originated this year would have been part of the quota and 4,000 would have been excluded and this is at a time when we have an all time low. Clearly, there is a need for a solution and we think mortgage insurance is a key part of that.

Mr. Simon Crone: To respond to Deputy Barry‘s second question, he is correct that €20,000 would be maximum claim amount in the example he gave and his understanding on that is correct. We are supportive of transparency. There is nothing to hide in what we are trying to promote. For example, in Finland the cost of the mortgage insurance is laid out and the borrower sees it transparently and it can also be capitalised into the loan and can get spread over a cost rather the borrower having to come up with, say, €2,000 in the example I mentioned. We would support such transparency. As Mr. Bennett mentioned, we do due diligence up front and then we do ongoing due diligence to make sure that the quality of underwriting prudencies continued to be applied and that the valuation standards are high.

On regional caps, we would support something like that. The house prices required for first time buyers in Dublin with the commensurate affordability and prudency that is applied is different from perhaps other parts of the country and so a different level may be suitable for different parts of the country. We agree that we would work with both State and privately owned organisations and we would not treat them any differently. They would need to have the right capabilities to do prudent levels of underwriting and we believe that exists today in Ireland. Those are answers to a few of the Deputy’s questions.

Mr. Stephen Rance: I will not try either to answer all ten of the Deputy’s questions in one go but I have an overview of this. In the proposals we put forward we recommended that Ireland have a national, standardised MI scheme backed by a consortium of insurers. That scheme would be under the oversight of the regulator. Therefore, we would hope that the regulator would examine some of the areas the Deputy raised, which include transparency, consumer representation, elements of capital relief and State bank versus commercial bank culture. We see the regulatory oversight as critical for managing something through the good times and the not so good times.

Chairman: Information on Liam Twomey Zoom on Liam Twomey We have the idea when we are in here that we are coming at this from the side of the mortgagee, the person who holds the mortgage, but they do not have that much to do with us. They may be beneficial but this is about the Government wanting stability in the market and we want to spread that risk and we do so between insurance operators and the banks and it just so happens that the person who is taking out the mortgage has to pay for that because that is the price of stability. Where this benefits the mortgagee is in terms of the cap, which would seem to have quite a dramatic effect on the market because it will allow who can come into this. The 15% that was mentioned is part of an EU measure.

Mr. Simon Crone: We were referring to the Central Bank proposals under CP87, so there is a 15% limit of lending to above 80%—–

Chairman: Information on Liam Twomey Zoom on Liam Twomey That is 15%.

Mr. Simon Crone: Yes and it would exclude many people.

Chairman: Information on Liam Twomey Zoom on Liam Twomey What the delegates said about the cap was interesting and we might return to that when we discuss this issue ourselves. The discussion this morning has been very interesting for us, some of it has been quite complex but we will tease it out when we have our own discussion on it. I thank the delegates for making their time available to us at short notice. The discussion will help us as we want to make our own submission on this. We had a request from the Minister for Finance that we as the finance committee put together a small report on this. We were not asked to submit it to the Central Bank but we decided that the most practical means is to submit it for the beginning of December. The Governor appeared before the committee yesterday and he expressed his own views on it and no doubt he will express further views on it. I thank the delegates again for making their time available to us and the discussion has been very useful. We will suspend the sitting and resume at 2 p.m. Is that agreed? Agreed.

  Sitting suspended at 12.20 p.m. and resumed at 2 p.m.