Central Bank to limit amount banks lend for home purchase

MayBea

johnp001 wrote: »

Is there research or statistics which state what the impact of 90%/3.5-LTI would be vs 80%/3.5-LTI?

This Central Bank report, centralbank.ie/publications/Documents/02RT14.pdf on p.9 states 'A one unit increase in the log of the current LTV ratio raises the probability of mortgage arrears by 8%.'

molloyjh

MayBea wrote: »

This Central Bank report, centralbank.ie/publications/Documents/02RT14.pdf on p.9 states 'A one unit increase in the log of the current LTV ratio raises the probability of mortgage arrears by 8%.'

I don't get this. What drives arrears is the cost of the mortgage against the income to pay for it, i.e. the LTI ratio. The LTV ratio simply identifies how much the loan is to the value at time of purchase. From a repayment point of view this can be 10% or 100% as long as the LTI rate is reasonable.

The LTV has no impact on arrears at all.

RecordStraight

molloyjh wrote: »

I don't get this. What drives arrears is the cost of the mortgage against the income to pay for it, i.e. the LTI ratio.

Bear in mind also that those who have a very small stake in their property are very fast to stop paying their mortgage.

As I pointed out upthread, the level of defaults in Ireland didn't track the unemployment rate as closely as they tracked the decline in property values. The recent increase in prices has also tracked a recent decline in new cases of arrears.

Eldarion

molloyjh wrote: »

The LTV has no impact on arrears at all.

I'd go as far as to say LTV has far more impact on arrears than LTI does. If LTV approaches or becomes greater than 100% you see huge swathes of arrears even if the LTI remains unchanged.

Jingle mails just don't happen when people are forfeiting significant equity.

molloyjh

RecordStraight wrote: »

Bear in mind also that those who have a very small stake in their property are very fast to stop paying their mortgage.

As I pointed out upthread, the level of defaults in Ireland didn't track the unemployment rate as closely as they tracked the decline in property values. The recent increase in prices has also tracked a recent decline in new cases of arrears.

Hang on, wait, are we agreeing now? :P

Eldarion wrote: »

I'd go as far as to say LTV has far more impact on arrears than LTI does. If LTV approaches or becomes greater than 100% you see huge swathes of arrears even if the LTI remains unchanged.

Jingle mails just don't happen when people are forfeiting significant equity.

But if my house is worth €100k and I get a mortgage for it for €100k I am far less likely to default then if my house is worth €500k and I get a mortgage for €400k.

Most people default because they can no longer afford the repayments. So LTI is far more important. During the last few years my LTV was over 100% because I was in negative equity. That didn't mean I was less able to afford my mortgage payments. In fact in terms of repaying my mortgage it was totally irrelevant.

The confusion here comes from the fact that during the boom people would get 95-100% mortgages that pushed their capacity to repay. So both the LTV and LTI were infeasible. For example at the time I got my mortgage I got it at an LTI ratio of around 5.0. And I know there were people getting loans with greater LTI ratios. That would have been a far bigger issue than the LTV rate. Luckily I had another 5-6 years or so before the crash which enabled myself and my wife to progress our careers to the point that the cuts we had to face in the recession were mitigated by our improved circumstance.

Bob24

molloyjh wrote: »

But if my house is worth €100k and I get a mortgage for it for €100k I am far less likely to default then if my house is worth €500k and I get a mortgage for €400k.

Well the two situations would be quite different:
- first case if you stop paying you end up with zero cash loss and a debt of 100k to the bank (who will try to cover some of it be selling the property and will have to chase you with no guarantee for the rest). If you decide to play hard balls or to move abroad you can hope to get away with no financial lost (not saying it is the right strategy, but some people will definitely consider that option). Also the bank is in a weak position if the property has lost value, because they know selling it will not recover the full amount you still owe them. So there are likely to offer you a deal.
- second case if you stop paying on top of your debt to the bank you are taking an instant hit of 100k in cash that you gave as a deposit (that was you own money and you will never see it again ... Which will make you think twice). The bank is also in a strong position as even if the price of your house has dropped 20%, selling it will still get them the full amount you owe them and you will be the one fully supporting the loss. No incentive for them to offer you a deal.

So yes if you think you have nothing to lose and want to play tough, you will indeed be much more likely to default in the first case.

molloyjh

Bob24 wrote: »

Well the two situations would be quite different:
- first case if you stop paying you end up with zero cash loss and a debt of 100k to the bank (who will try to cover some of it be selling the property and will have to chase you with no guarantee for the rest). If you decide to play hard balls or to move abroad you can hope to get away with no financial lost (not saying it is the right strategy, but some people will definitely consider that option). Also the bank is in a weak position if the property has lost value, because they know selling it will not recover the full amount you still owe them. So there are likely to offer you a deal.
- second case if you stop paying on top of your debt to the bank you are taking an instant hit of 100k in cash that you gave as a deposit (that was you own money and you will never see it again ... Which will make you think twice). The bank is also in a strong position as even if the price of your house has dropped 20%, selling it will still get them the full amount you owe them and you will be the one fully supporting the loss. No incentive for them to offer you a deal.

So yes if you think you have nothing to lose and want to play tough, you will indeed be much more likely to default in the first case.

But all that is predicated on going into arrears. We're talking about the probability of going into arrears, not what happens if I do.

The probability of me going into arrears on a low LTI ratio is far lower than the probability of me going into arrears on a high LTI ratio. All regardless of what the LTV is. Therefore the probability arrears should be measured against LTI and not LTV.

Bob24

molloyjh wrote: »

But all that is predicated on going into arrears. We're talking about the probability of going into arrears, not what happens if I do.

The probability of me going into arrears on a low LTI ratio is far lower than the probability of me going into arrears on a high LTI ratio. All regardless of what the LTV is. Therefore the probability arrears should be measured against LTI and not LTV.

If you know 100k of your own money are potentially at stake if you do go into arrears, you will make all possible efforts for it not to happen.

If you feel like there will be no consequence for you, you might decide to allocate your money elsewhere. See strategic defaulters as the most blatant example, but it could also take other shapes.

gaius c

molloyjh wrote: »

Most people default because they can no longer afford the repayments

Big survey on US arrears showed that NE is a significant factor in folk deciding that mortgage payments should be dropped even though they can afford them.

Greyian

molloyjh wrote: »

But all that is predicated on going into arrears. We're talking about the probability of going into arrears, not what happens if I do.

The probability of me going into arrears on a low LTI ratio is far lower than the probability of me going into arrears on a high LTI ratio. All regardless of what the LTV is. Therefore the probability arrears should be measured against LTI and not LTV.

People are more inclined to choose to go into arrears if they have a higher LTV.

Imagine if you bought a house for €200,000, with an 80% mortgage. If house prices rise 100%, it's suddenly worth €400,000, yet you still only owe €160,000 principle on the mortgage. If you happen to have wage cuts etc, you're more inclined to make sacrifices in other areas, to keep paying the mortgage, because you're getting something which is worth a lot more than you're actually paying.

On the flip side, if the house price suddenly fell 75% to €50,000, and you're paying a €160,000 mortgage, you're much more inclined to just decide "feck it, I'm not paying for this, it's not worth it", and go into arrears. You'll be able to live there free for a while, because it takes time for the bank to repossess (if they get to repossess at all), and after they sell it, they can't exactly chase you for the balance if you have nothing of value.

By ensuring people have a proper stake in the property (hence the reason for the higher deposit requirements), you reduce the danger of people slipping into negative equity and not bothering to make any/full repayments. That's obviously not to say that every person who goes into negative equity will just choose to stop paying their mortgage, but the frequency with which people fall into arrears is elevated (quite considerably), when they have a very low (or no, or even negative) stake in the property.

molloyjh

But how many people choose to go into arrears vs people who find themselves no longer able to afford their mortgage? Surely given the impacts on your credit rating etc this isn't something that would appeal to that many people?

gaius c

molloyjh wrote: »

But how many people choose to go into arrears vs people who find themselves no longer able to afford their mortgage? Surely given the impacts on your credit rating etc this isn't something that would appeal to that many people?

Survey suggested approx a third of defaulters are strategic.

And sure what consequences would you face? Only a few days ago there was a case of a family finally being kicked out of the luxury house they haven't paid a cent on in over 5 years.

I wouldn't mind living rent-free for five years!

molloyjh

gaius c wrote: »

Survey suggested approx a third of defaulters are strategic.

And sure what consequences would you face? Only a few days ago there was a case of a family finally being kicked out of the luxury house they haven't paid a cent on in over 5 years.

I wouldn't mind living rent-free for five years!

Wow, that high!? I'm surprised by that. But if you default then it'll affect your credit rating and your ability to borrow in the future....

The_Conductor

gaius c wrote: »

Survey suggested approx a third of defaulters are strategic.

And sure what consequences would you face? Only a few days ago there was a case of a family finally being kicked out of the luxury house they haven't paid a cent on in over 5 years.

I wouldn't mind living rent-free for five years!

That property is currently valued at 7.1m but it has almost 76m of loans against it- quite how, I have no idea....... This case is far from normal- and has been through the commercial courts- given the case. Its only finally being handed over- because the parents were judged to have tried to obfuscate the ownership using a trust and other mechanisms to thwart attempts to have the charge on the property enforced.

RecordStraight

molloyjh wrote: »

Wow, that high!? I'm surprised by that. But if you default then it'll affect your credit rating and your ability to borrow in the future....

In fairness, a lot of strategic defaulters would be defaulting on investment properties, holding out for a write-off. They would typically already own a PPR and keep up payments on that, knowing the odds of it being repossessed are beyond remote.

Bob24

gaius c wrote: »

Survey suggested approx a third of defaulters are strategic.

And sure what consequences would you face? Only a few days ago there was a case of a family finally being kicked out of the luxury house they haven't paid a cent on in over 5 years.

I wouldn't mind living rent-free for five years!

Exactly.

And it is not only strategic default.

Even at the time when people decide what mortgage to get, they will be more likely to go for a risky option (for example taking a mortgage that will become unsustainable if one of the couple's income is lost) if they know they can walk away with limited financial loss. Whereas if from day one they know walking away will cost them savings which are the result of hard work and financial sacrifices over several years, they will think more carefully about how risky they want their mortgage to be.

So higher LTV ratios will make people more reckless even before they actually get the mortgage.

Stream

Michael D Not Higgins wrote: »

Principal Dwellings
in arrears over 720 days: €8billion
total balance owed on all loans: €105billion

Buy to Let
in arrears over 720 days: €4.8billion
total balance owed on all loans: €29billion

Says it all to me

Source: Central Bank stats Q3 2014

So buy to let is about 22% of overall loans. I wonder what the proportion was of BTL during 2004-2009 if that period was look at as a snapshot. I expect it was a higher proportion as it seemed like there was a large increase in investors during that time which I also believe was a large contributor to rapid price increases. I checked the CBI statistic reports but I do not believe it breaks this detail down year by year.

Michael D Not Higgins

Stream wrote: »

So buy to let is about 22% of overall loans. I wonder what the proportion was of BTL during 2004-2009 if that period was look at as a snapshot. I expect it was a higher proportion as it seemed like there was a large increase in investors during that time which I also believe was a large contributor to rapid price increases. I checked the CBI statistic reports but I do not believe it breaks this detail down year by year.

Owner occupied is pretty steady from early 90s to the bubble bursting. BTL was always the minority of the market and trying to blame the bubble on investors is scapegoating.

It's more than likely that the additional impact of investors drove the supply higher as well thus reducing the overall effect, i.e. remove the investors and you have less demand driving less supply leading to similar conditions.

A quick look at another graph of investor purchases averages out to low 20s% over the 10 year period 97-07. That tallies well with the BTL figures above.

jay0109

Talking to my local bank (mortgage officer) the other day and they are coming under pressure from Head Office already.
These new rules are going to hit trader uppers as hard as FTB's. It's the end of the amature landlord (which is probably a target of the Govt's and their setting up of REITs and encouragement of the big American investor groups to come in here such as Kennedy Wilson)!

If your a trader-upper and have a small deposit, then your going to have to sell (assuming no NE) to get the new mortgage...especially the case if you have a small-medium deposit.
Even if you have a large deposit and say 2 btl's, then 1 of them is going to have to go.
This is assuming above average salaries as well.

We went through some numbers and the amounts you'll be allowed borrow in future are so heavily impacted by the total mortgage debt you'll have after the trade-up, that it leaves very little room to hold on to the houses/apt's you have.
Add in the LtI ratio of 3.5 and it makes credit very tight.

Very interesting times ahead

jimosterberg

I viewed a house recently around the 350,000 mark. Similar houses in the estate were quickly snapped up between sept-nov last year. 3 weeks on sale and a few viewings and there's only one offer of about 300,000. Maybe a sign of things to come with the new rules.

The_Conductor

jimosterberg wrote: »

I viewed a house recently around the 350,000 mark. Similar houses in the estate were quickly snapped up between sept-nov last year. 3 weeks on sale and a few viewings and there's only one offer of about 300,000. Maybe a sign of things to come with the new rules.

I got an e-mail from DNG listing a number of price decreases (of between 6 and 10%) for properties in West and South Dublin between 160 and 300k....... It would seem to me that prices are definitely falling- and appear to be in all market segments (that I'm monitoring).

gaius c

Stream wrote: »

So buy to let is about 22% of overall loans. I wonder what the proportion was of BTL during 2004-2009 if that period was look at as a snapshot. I expect it was a higher proportion as it seemed like there was a large increase in investors during that time which I also believe was a large contributor to rapid price increases. I checked the CBI statistic reports but I do not believe it breaks this detail down year by year.

BTL made up approx 60% of the market in 2006.

Stream

jay0109 wrote: »

We went through some numbers and the amounts you'll be allowed borrow in future are so heavily impacted by the total mortgage debt you'll have after the trade-up, that it leaves very little room to hold on to the houses/apt's you have.
Add in the LtI ratio of 3.5 and it makes credit very tight.

I was curious about this point and whether they would be looking at total mortgage debt after trade up for the LTV and LTI measures. I'm in NE so I was particularly interested in relation to LTI.

Did they specifically mention that LTI would take in to consideration total mortgage debt? If so, I wonder will they take rental income in to account.

jay0109

Stream wrote: »

I was curious about this point and whether they would be looking at total mortgage debt after trade up for the LTV and LTI measures. I'm in NE so I was particularly interested in relation to LTI.

Did they specifically mention that LTI would take in to consideration total mortgage debt? If so, I wonder will they take rental income in to account.

Yes, they're prepared to take rental income into account but at about 80% of what you'll get per annum...."to allow for vacancies, repairs etc"!!! Crazy I said for the areas of Dublin where there's q's out the door for rentals.

So they add up all the debt you'll have, apply the LtI ratio, throw in all income, and are also factoring in weekly living exps to see is that criteria met.
I was taken aback.

My mortgage approval is up in a few months and I'll roughly get half of what I'm currently approved for, unless I sell up what I currently have

RecordStraight

jay0109 wrote: »

Yes, they're prepared to take rental income into account but at about 80% of what you'll get per annum...."to allow for vacancies, repairs etc"!!! Crazy I said for the areas of Dublin where there's q's out the door for rentals.

Not crazy - prudent. There won't always be queues out the door.

The funny thing is that the banks will probably forget this prudent approach when it is actually necessary.

MouseTail

Michael D Not Higgins wrote: »

Owner occupied is pretty steady from early 90s to the bubble bursting. BTL was always the minority of the market and trying to blame the bubble on investors is scapegoating

.

Very interesting chart, the depletion of social housing from c20% of the housing stock to less than 10% is pretty shameful.

Glenbhoy

jay0109 wrote: »

Yes, they're prepared to take rental income into account but at about 80% of what you'll get per annum...."to allow for vacancies, repairs etc"!!! Crazy I said for the areas of Dublin where there's q's out the door for rentals.

So they add up all the debt you'll have, apply the LtI ratio, throw in all income, and are also factoring in weekly living exps to see is that criteria met.
I was taken aback.

My mortgage approval is up in a few months and I'll roughly get half of what I'm currently approved for, unless I sell up what I currently have

But isn't that a good thing? I don't know your circumstances etc, but, really, we've seen what has happened in the past when people are utterly dependent on the wellbeing of one sector of the economy, would selling up really be such a bad thing?

jay0109

Glenbhoy wrote: »

But isn't that a good thing? I don't know your circumstances etc, but, really, we've seen what has happened in the past when people are utterly dependent on the wellbeing of one sector of the economy, would selling up really be such a bad thing?

The rental would have more than covered the mortgage- sell after a few years and get the ppr mortgage down was the plan. But I'm easy either way

The thing is we have a very large deposit and I thought we would be a shoo in for a large drawdown. And we were when we spoke to them last October.
But today surprised me. The mortgage officer couldn't even answer whether we'd qualify for the 15% exemption or how that will work.

So if we're getting the credit we're seeking seriously curtailed, it's going to be very tough on a lot of people.

El_Dangeroso

MouseTail wrote: »

Very interesting chart, the depletion of social housing from c20% of the housing stock to less than 10% is pretty shameful.

To be fair we were practically a communist country in the 60's and 70's, even many hotels were semi-state operations.

I know there's a current crisis with social housing but maybe we don't need to go back to the level we had when we could have been reasonably classed as a third world country.

Glenbhoy

jay0109 wrote: »

The rental would have more than covered the mortgage- sell after a few years and get the ppr mortgage down was the plan. But I'm easy either way

The thing is we have a very large deposit and I thought we would be a shoo in for a large drawdown. And we were when we spoke to them last October.
But today surprised me. The mortgage officer couldn't even answer whether we'd qualify for the 15% exemption or how that will work.

So if we're getting the credit we're seeking seriously curtailed, it's going to be very tough on a lot of people.

Are the current properties in NE? I would think (no info on this) that the 15% exemptions will be hoarded until later in the year when they have a better idea of what figure they can put on 15% and it will be a case of cherry picking high income applicants in any case.
From the banks p.o.v. if the market takes a slight downturn, their exposure would be amplified in your case, leverage works both ways as they found out a few years ago!