I would like to 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 would certainly accept that the market is sub-optimal at the moment. However, I regret that I cannot accept the Bill as proposed by the Senator. I have asked my officials to consider whether elements of this proposal could be feasibly rolled out as the financial system is returned to sustainable levels.
Background to the Danish Balance Principle Model
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 very 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, unsecured funding from the money markets, 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 which largely comprises customer deposits which do not tend to move frequently. Indeed significant progress in aligning the quantum of bank lending with customer deposits has already been made in this regard.
However that is not to say that 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. Indeed it is for this reason that this Government is very supportive of the covered bond structure we have in place in this country which has proven to be a robust and valued framework by international investors.
Reasons for rejection of the Bill
As Senators can appreciate, since this Government has taken office much effort and focus and substantial tax payer resources have been directed at the stabilisation of a badly damaged banking system. Any proposal for the introduction of new initiatives requires 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 over 200 years and is specific to the Danish property market. It is a concept that has worked very well in a 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 to Ireland 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 underway.
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 residence in the State. Compliance with the Code is mandatory on 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 and/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 twelve months from the date the borrower is classified by the lender as being under its Mortgage Arrears Resolution Process (i.e. day 31 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 6 months from the time when the borrower defaults until a forced sale can be carried through. The Government could not countenance a system which 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 so 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 which the banks have underway.
The Danish model and the Bill proposed by the Senator involve the standardisation of mortgage products most notably around Loan to Value limits. Danish regulations and the proposed Bill limit the amount that can be loaned to homeowners (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 amount of mortgages issued in Ireland. Most banks in Ireland currently offer mortgages of 92% LTV. This is important to many potential borrowers, especially the important First Time Buyers market who would struggle to find the additional 12%.
In addition, the Capital Requirements Directive and Regulation is currently in the trilogue phase of negotiations between 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 and the outcome of the negotiations has the potential to require significant change to the Danish 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.
Current mortgage situation in Ireland
The Government is playing its part in returning the property and mortgage market to normal levels although I want to make it clear that the Government will not artificially stimulate demand. Last year’s Budget aimed to restore confidence, re-build 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 per cent and non-first time buyers will benefit from relief at 15 per cent. This measure gives certainty to those considering purchasing a home. I want to again strongly emphasise that this mortgage interest relief measure will come to an end at the end of this year. There will be no extension to this measure given the current budgetary position. Furthermore, purchasers should make sure to factor in the time required between purchase and mortgage drawdown in order to qualify for mortgage interest relief so we are getting really close to the time when the curtain comes down on this.
The Residential Property Prices Register which was recently launched also gives certainty to the market around what price has been paid for specific properties and is already helping to guide commentators in relation to the current state of the market.
The Budget also introduced a Capital Gains Tax incentive for property purchased between 7th 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 and farmland, and to residential property.
Since then, 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 it is committed to advancing appropriate measures to assist those mortgage holders who are experiencing real and genuine difficulty. In this regard, the Government is now actively implementing the main recommendations contained in the report of the Inter-Departmental 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 the Committee stage of the Bill was passed by the Dáil last month;
·The Minister 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;
·Also an extensive independent mortgage advice framework has now been put in place by the Minister of Social Protection comprising (i) an enhanced website www.keepingyourhome.ie (ii) a Mortgage Arrears information helpline, and (iii) the provision of free independent ‘one-to-one’ professional financial advice to borrowers when considering a long term forbearance/resolution offer from their lender. The list of accountants providing this service is located on the www.keepingyourhome.ie website.
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 I already mentioned, to assist genuine mortgage holders in difficulty and the Government sub-committee on mortgage arrears, which is chaired by An Taoiseach, continues to meet to ensure this receives priority attention across relevant Departments and agencies. I note that the comments of the Secretary General of the Department of Finance, John Moran, and the Director of Credit Institutions and Insurance Supervision, 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 that 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 in 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 Irish 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 and I regret that we cannot accept it at this time. However, I would 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.