Irish Financial Review

Mortgage lending points to all-time low in 2012

The number of mortgages granted in 2012 could fall to an all-time low as lenders continue to restrict lending.

Lending levels in 2012 could hit all-time low

Based on the first quarter figures published by the Irish Banking Federation, a total of just 2,630 mortgages were granted during that period. However, when re-mortgage and top-up loans were stripped out (these loan are not used for a property purchase), just 2,213 mortgages were granted to first time buyers, existing mortgage holders and those looking to purchase an investment property.

First quarter statistics can provide important early indications as to the overall level of mortgage lending activity for a given year. This was certainly the case for 2011, where lending activity in the first quarter turned out to be a very proxy for the full year and where lending fell to a 40-year low.

2012 is off to really bad start. If the first quarter figures hold up for the full year, 2012 could see fewer loans being granted than at any point since records began in 1970.

In 1970 a total of 8,929 loans were granted.

In 2012, as few as 8,852 loans could be granted.

What is even more interesting is the number of mortgages relative to population and here, we have a total wipe-out.

In 1970, there were just over 2.9million people living in the country.

Today, the population is just over 4.5Million

There has been a population growth of over 55% since the early 1970’s. However, it is extraordinary to think that a society that had been coaxed into becoming a ‘credit society’ through a combination of easy access and low-cost credit now has less access to credit than at any point since records began.

Without a functioning credit market, especially a functioning mortgage market, it is difficult to see a meaningful return of buyers to the property market.

Year Mortgage Units Data Source
1970 8,929 DOE
1971 11,728 DOE
1972 14,168 DOE
1973 16,286 DOE
1974 18,313 DOE
1975 21,241 DOE
1976 22,051 DOE
1977 22,039 DOE
1978 22,648 DOE
1979 24,742 DOE
1980 26,357 DOE
1981 26,241 DOE
1982 24,113 DOE
1983 27,927 DOE
1984 27,980 DOE
1985 28,060 DOE
1986 27,632 DOE
1987 28,379 DOE
1988 36,939 DOE
1989 38,580 DOE
1990 31,051 DOE
1991 33,720 DOE
1992 42,044 DOE
1993 38,490 DOE
1994 46,483 DOE
1995 47,035 DOE
1996 56,009 DOE
1997 57,901 DOE
1998 61,407 DOE
1999 70,817 DOE
2000 74,258 DOE
2001 66,786 DOE
2002 79,292 DOE
2003 84,749 DOE
2004 98,709 DOE
2005 107,680 DOE
2006 111,253 DOE
2007 84286 DOE
2008 53691 DOE
2009 25172 DOE
2010 18382 DOE
2011 11,131 DOE
2012 8852* IBF (estimated based on 2,213 units in Q1)

Ulster Bank fails to impress

We are entering the third week of the missing records at Ulster Bank.

Ulster Bank has damaged its reputation as well as the trust customers have in it.

At this point, the problem has moved beyond inconvenience, it is now a major concern. After all, Ulster Bank is a major bank in its own right, as well as being part of one of the largest banking groups in the UK.

How could a bank such as Ulster Bank have gotten it so wrong? After all, if a customer of the bank were unable to make a monthly payment using the same reason as Ulster Bank uses now; that it cannot locate the records, it is hard to imagine that the bank would be too lenient in their handling of that customer.

Perhaps the reasons for the ongoing problems at the bank are valid, but they are now unacceptable.

The Central Bank of Ireland now needs to step up its efforts and take considerable action to ensure that this problem does not happen again.

Too many people rely on banking to protect their money and ensure their bills are paid. More important, electronic and online banking are growing in importance more and more. Denial of access to funds cannot be tolerated. This is where Central Bank vigilance and enforcement needs to play a major role and deterrent against flimsy internal controls.

Personal Insolvency Bill 2012 – mortgages and debt

It was mid-December 2010 when the Law Reform Commission presented its recommendations for the reform of the Irish legal system in relation to how our society manages and deals with the problem of indebtedness.

Legal solutions for with problem debt.

The LRC had long advocated for the reform.

Yesterday, the Government finally presented the Personal Insolvency Bill 2012. It is a welcome break from the past. It provides for a range of options that will become available to citizens when the Bill finally becomes law.

The main purpose of the new Bill is to provide for a much more humane way of dealing with the problem of indebtedness in Irish society. It is a move that follows similar actions taken in other countries for decades.
The detail contained within the bill is extensive and it is probably safe to say that legal interpretations taken from the bill will make for interesting conversation and debate in the weeks and months ahead. However, from a layman’s perspective, the new Bill can be summarised as follows:

The Bill will permit those that who no longer to service their current level of debt to seek a remedy through two primary routes:

1. They can do so outside of the Courts, this is called the non-judicial option and it has three main components, all of which are listed below.
2. They can go through the Courts – the judicial option.

The non-judicial option. Under the new legislation, there are a number of options expected to be made available to citizens that have unaffordable levels of debt, those include:

1. Debt Relief Notice
These allow for the write-off of unsecured debt up to €20,000, subject to a three-year supervision period. It would cover unsecured loans such as credit card debt and personal loans but not mortgage debt. .

2. A Debt Settlement Arrangement
This covers unsecured debts over €20,000, last for 5 years and can only come into force with the agreement of creditors.

3. A Personal Insolvency Agreement
These covers secured debts such as mortgages as well as unsecured debts. This will last for 6 years (but could be extended to 7 years). The Personal Insolvency Arrangement will be available for the agreed settlement of secured debt (mortgages) and unsecured debt. The upper limit is €3million

It all sounds pretty simple, well it’s not! The big sticking point that is likely to surface is the agreement of the creditors to the various options. For example, in the third option, it could be possible that banks refuses a customers proposal if a particular bank or number of banks feel the that customer has not made every possible effort to rein in spending. It could be easy to get carried away with what may or may not happen under the new law, but the non-judicial option will be a financial battleground. Also, contained throughout the Bill are numerous provisions designed to ensure citizens seeking to avail of the various options are honest and complete when disclosing their personal financial affairs?

The new Bill also provides other measures such as interim protections while a Debt Settlement Arrangement and Personal Insolvency agreement are being considered.

There are also residency requirements (1-year) for those that wish to apply for the various options.

Also, the new Bill provides for the establishment of the Personal Insolvency Service as well as Personal Insolvency Practitioners, so this is a brand new industry with lots of players. The position of the Personal Insolvency Practitioners will play a central role and go-between the citizens who apply for one of the non-judicial debt options and the various creditors. It will require time to see how they balance the financial tightrope.

The judicial option is far more serious as it is processed through a court of law in a very public manner. Ultimately, this is the process where one petitions the court to be declared bankrupt, where the consumer’s case (all of their current financial details) is presented and analysed and where a judge decides to declare the petitioner bankrupt or not. As with any court of law, full and complete financial declaration is a must and is enforced by statute. In other words, being absolutely honest about ones finances is not a choice; it is a legal requirement.

Under the new Personal Insolvency Legislation, if one is declared bankrupt means that they will be in a financial no-man’s-land for 3 years instead of the 12 presently. There are also a lot of other factors, but the most important change is that one can get on with their lives after three years instead of a decade-and-a-quarter. There are other important change in the law, but the primary point is that this is a significant departure from what has existed up to now.

Other factors
Mortgage Support – A new mortgage arrears support unit will be established later this summer. It will be managed under the Department of Social Protection. Its purpose will be to provide information to those facing mortgage difficulty and its main purpose will be to be independent of the banks. It will operate independent of the Money Advice and Budgeting Service (MABS). At this point, there appears to be a lot of emphasis on the provision of information electronically via the Internet, although there will also be staff available to meet with mortgage holders. It is likely that face-to-face meetings will only be provided in the most severe mortgage arrears cases.

A mortgage-to-rent scheme is due to be made available under the Housing and Planning Portfolio of Minister Jan O’Sullivan.
This option is likely to be offered to the more extreme cases where a combination of debt levels and severely diminished earnings potential would rule out the likelihood of one returning to the full cost of homeownership in the medium term.

Additional mortgage options (from the banks).

Negative equity mortgages
Several banks have been piloting so-called negative equity mortgages. These are relatively simple. If a mortgage holder wishes to sell their home for say €150,000 and still owe €250,000 on the property, their ‘negative equity’ is €100,000. Now, if they can afford the €250,000 loan, then what banks agreeing is to allow those mortgage holders to a new property. And, because property prices have fallen by over 50% since their peak, banks have been allowing some mortgage holders to carry their total debt, even if is higher than the value of the property they are buying. There are no hard and fast rules and banks have been agreeing these loans on a case-by-case basis. Also, a rule of thumb, negative equity mortgages are generally designed to allow those than can easily afford their current debt levels to move property.

Split mortgages
Split mortgages are mortgages where part of the mortgage to be ‘parked’ for a specific period of time and the mortgage holder pays on the remaining amount of the mortgage that they can afford at the time they agreed to ‘split’ the loan. These loans have been proposed by many of the main mortgage lenders and have been designed to provide financial breathing space to mortgage holders in financial difficulty. However, mortgage holders are likely to face incurring interest charges on the amount of the mortgage that is parked or set aside.

Reduced interest rates for those unable to meet monthly payments.
Reduced interest rate mortgages. It has been reported that few banks are considering this option and they are unlikely to be made available to mortgage holders that carry tracker mortgage deals.

Long-term interest-only deals
Long-term interest only loans will result in significantly lower monthly repayments. However, such loans do not result in any capital reduction, which will need to be eventually repaid.

Deferred-interest loans
Deferred interest loans were originally proposed by the Government appointed group to consider remedies for the growing problem of mortgage arrears. Under the deferred interest option, mortgage holders would have interest payments deferred if they were to pay at least 66% of the interest on their loan. This would give distressed borrowers five years to get back on their feet. When the accumulated amount in the deferred interest account is equal to a total of 18 months interest, or when the borrowers have been in the deferred interest scheme for five years, the mortgage will be categorised as unsustainable.

Assisted sales
Assisted property sales are property sales where a bank assists the property owner sell their property in the open market and outside of the foreclosure process, which can have a negative impact on the perceived value of the property. This is a relatively common option is some other countries. It provides for an opportunity to achieve the best price for the property and protect the privacy of the property owner.

Frank Conway is founder of the Irish Financial Review.

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