Central Bank mortgage lending rules discussion

jay0109

AIB you say....well I never

SarahMollie

http://www.irishtimes.com/business/financial-services/aib-accused-of-misleading-regulators-on-loans-progress-1.2611768

So yes, lets trust them more, they've clearly learned the error of their ways.

I think whats getting missed here is that the CB rules were never to make things easier for mortgage applications to go through really quickly for people.

Their purpose was twofold.
1. To stave off another housing bubble - prices were rising dramatically from about 2012-2015 and it was like dejavu all over again. Increasing the amount people can borrow doesnt allow people to buy bigger/better houses. It enables people selling their house to charge more because more people have more money, and ultimately the buyer just becomes more indebted for the same house.
2. To save the banks from themselves. All companies will seek to maximise profit, and never was this more true that with banks. The difficulty is that over the past number of decades, financial institutions created ever more opaque "vehicles" in order to make money - on paper at least.
This is fine (to a point) for investment banks and their ilk to behave in this high risk manner, but our retail banks with Tom, Dick and Harrys life savings on deposit have been deemed to institutionally important to fail, yet they were tied into a lot of the same high risk behaviours, as they needed to always make more money. They were relying on lax "regulation", self certification (we say out deposit ratios are fine, therefore they are) and that the general public didnt understand what they were up to, just dazzled by all the money. Greed breads Greed.


Anyhow, since the CB rules have been in place, the property market has slowed and become more predictable. This is a good thing for any would be buyers out there. Maybe the process is slower, but at 3.5x income, its a mortgage they can afford.

johnp001

SarahMollie wrote: »

http://www.irishtimes.com/business/financial-services/aib-accused-of-misleading-regulators-on-loans-progress-1.2611768

So yes, lets trust them more, they've clearly learned the error of their ways.

I think whats getting missed here is that the CB rules were never to make things easier for mortgage applications to go through really quickly for people.

Their purpose was twofold.
1. To stave off another housing bubble - prices were rising dramatically from about 2012-2015 and it was like dejavu all over again.
2. To save the banks from themselves. All companies will seek to maximise profit, and never was this more true that with banks. The difficulty is that over the past number of decades, financial institutions created ever more opaque "vehicles" in order to make money - on paper at least.
This is fine (to a point) for investment banks and their ilk to behave in this high risk manner, but our retail banks with Tom, Dick and Harrys life savings on deposit have been deemed to institutionally important to fail, yet they were tied into a lot of the same high risk behaviours, as they needed to always make more money. They were relying on lax "regulation", self certification (we say out deposit ratios are fine, therefore they are) and that the general public didnt understand what they were up to, just dazzled by all the money.

It is never fine for an institution to risk its own solvency if the consequences of insolvency are that it will be bailed out by the taxpayer.

And any institution that believes that it is likely to be bailed out in the case that it becomes insolvent has no incentive to protect its own solvency. Hence the behaviour highlighted by the whistleblower at AIB.

SarahMollie

johnp001 wrote: »

It is never fine for an institution to risk its own solvency if the consequences of insolvency are that it will be bailed out by the taxpayer.

And any institution that believes that it is likely to be bailed out in the case that it becomes insolvent has no incentive to protect its own solvency. Hence the behaviour highlighted by the whistleblower at AIB.

The taxpayer (in this country at least) bailed out retail banks. They then sold off a lot of their divisions that were engaging in non core activity, or what was left of them at least.

Plenty of Investment Banks did go to the wall, most famously Lehman Brothers, as happens with any company that makes bad decisions.

johnp001

SarahMollie wrote: »

The taxpayer (in this country at least) bailed out retail banks. They then sold off a lot of their divisions that were engaging in non core activity, or what was left of them at least.

Irish taxpayer was therefore on the hook for the non retail banking losses of the bailed out institutions. Notably Anglo.

SarahMollie wrote: »

Plenty of Investment Banks did go to the wall, most famously Lehman Brothers, as happens with any company that makes bad decisions.

That's one example. You can hardly say "any company". Didn't happen to Goldman or AIG.

SarahMollie

johnp001 wrote: »

Irish taxpayer was therefore on the hook for the non retail banking losses of the bailed out institutions. Notably Anglo.


That's one example. You can hardly say "any company". Didn't happen to Goldman or AIG.

OK fine, as *can* happen to any company that behaves recklessly. And I never said it was the only example, just an example.

The point, as I believe was clear from my first post is that there is a difference between whats an acceptable risk profile for a retail bank versus other financial institutions.

You seem to be determined to nit pick when thats not what the thread is about, nor central to the point I was making.

To reiterate, the point is that the CB rules are to keep our retail banks from behaving recklessly.

MarkAnthony

I confused, you say where it's affordable the 3.5 LTI should not apply, where is isn't affordable the LTI should apply?

I think you've fundamentally misunderstood what the LTI is. The LTI gives you the affordability criteria and is generally a maximum with some exceptions. Where someone has less disposable income (kids etc) the banks would offer less.

The LTI changes with income, if you want to borrow more, earn more. If it's a case of you can live more frugally than the average - I personally do more thanks to the wife than anyone else - then save more of a deposit. Alternatively buy a house within your means, clear the mortgage quickly and move.

The housing market is still overheating due to lack of supply. If anything the CB should be tightening the LTI rules not relaxing them. I was offered 10x out combines salary back in the day - madness. If the CB rules allowed for 5x someone would be posting here complaining about that. 3.5x is sensible and more than previous generations were generally allowed they seemed to manage.

Flatzie_poo

The fundamental point of my theory is not to limit the amount of exemptions.

Lets say for example a bank has 50 exemptions to use in a year.

55 identical applicants, with 100% identical financial status (not likely, but I'm using this point for illustration only) come through the door looking to borrow.

Let's say it's the 12th of January 2016 this occurs. All at once. Efficiency is through the roof on this date.

All 55 people qualify in theory for an exemption. However the bank only has 50 places to exempt due to CB limitations.

Why should they turn these 5 people away? Or say come back in 2017?

If 50 applicants qualify for this exemption - deemed the appropriate risk - then the 55 people should.

I think that 3.5x the salary is a fantastic idea where there is higher risk/caution needed.

However, if applicants are in a comfortable position with disposable income after outgoings incl the mortgage repayment they are seeking- the bank should have facility to seek approval of that loan even if he/she is applicant 51.

Michael D Not Higgins

Flatzie_poo wrote: »

Lets say for example a bank has 50 exemptions to use in a year.

The exemptions are not a number but a percentage of the value of the loan book. What appears to be happening is the banks are estimating the potential market for the period and have a line of potential customers looking for exemptions.

They tot up the numbers and pick the best risk profiles within their allotted exemption limits and everyone else has to comply with the regulations for the rest of the period to make up for the banks using all the exemptions at the start. I'm not blaming them, if they didn't use the exemptions they'd lose the good business to a rival bank.

The Central Bank however have the economic data and have done the research to show on the whole that the loan book should be 85% below 3.5 LTI. They understand there are exceptions and have allowed 15% of the loan book value to be above this level. They have the research to show that's sustainable.

The fundamental point of the Central Bank rules IS to limit the exemptions. On a case by case basis, the bank deems who's appropriate to qualify for an exemption but it's not based on individual circumstances for the loan book as a whole. The sustainable way to keep the market prudent is limiting the exemptions available.

PhoenixParker

Flatzie_poo wrote: »

The fundamental point of my theory is not to limit the amount of exemptions.

Lets say for example a bank has 50 exemptions to use in a year.

55 identical applicants, with 100% identical financial status (not likely, but I'm using this point for illustration only) come through the door looking to borrow.

Let's say it's the 12th of January 2016 this occurs. All at once. Efficiency is through the roof on this date.

All 55 people qualify in theory for an exemption. However the bank only has 50 places to exempt due to CB limitations.

Why should they turn these 5 people away? Or say come back in 2017?

If 50 applicants qualify for this exemption - deemed the appropriate risk - then the 55 people should.

I think that 3.5x the salary is a fantastic idea where there is higher risk/caution needed.

However, if applicants are in a comfortable position with disposable income after outgoings incl the mortgage repayment they are seeking- the bank should have facility to seek approval of that loan even if he/she is applicant 51.

If al 55 people qualify for an exemption then the 55 houses they're planning to buy just went up in price by the extra bit they've been allowed to borrow.

You seem to believe that each of those 55 people will gain an advantage over the market by relaxing the exemption rules, but history has shown us very clearly that what actually happens is that each of those 55 people ends up screwed over by spending more than necessary for a house and the bank ends up with (potentially) more profit.

Each of those 55 people are far more likely to default due to changes in their circumstances beyond their control - ill health, job loss, reduced working hours, addition of kids. Should that happen on a wide spectrum (as happened in the recession) then the rest of us end up paying for it.

Central Bank rules all the way!

tomfoolery60

PhoenixParker wrote: »

You seem to believe that each of those 55 people will gain an advantage over the market by relaxing the exemption rules, but history has shown us very clearly that what actually happens is that each of those 55 people ends up screwed over by spending more than necessary for a house and the bank ends up with (potentially) more profit.
......

Central Bank rules all the way!

Completely agree - it's difficult to look beyond one's personal circumstances and so we often overlook the macro/second order effects that a relaxation would have (namely for every additional € I can borrow/spend on a house, someone else can too => higher clearing price of that house).

The fundamental driver of house prices is availability of credit (income X lending multiple) and relaxing these rules absent any other measures would just mean those that can afford it wind up with bigger mortgages and the same houses.

Given we seem to have embraced housing NIMBY-ism and chosen the ultra restrictive planning practices of South East England, it's even more important that we restrict credit before things get out of hand.

john_this

Hi, I have a question on the exemption rule that nobody seems to have touched on, and would be interested to know. Myself and my partner are on a combined salary of over €100k, and are looking at buying a house for €300k, and would need a 40k deposit (FTB's) and we currently have around 30k, this would mean a mortgage of approx 2.5 times our salary.

Basically, most of the talk is around the exemption for limits on the mortgage ceiling, can the exemption be applied to the deposit rule also? Eg 10% for the entire mortgage?

Konata

john_this wrote: »

Hi, I have a question on the exemption rule that nobody seems to have touched on, and would be interested to know. Myself and my partner are on a combined salary of over €100k, and are looking at buying a house for €300k, and would need a 40k deposit (FTB's) and we currently have around 30k, this would mean a mortgage of approx 2.5 times our salary.

Basically, most of the talk is around the exemption for limits on the mortgage ceiling, can the exemption be applied to the deposit rule also? Eg 10% for the entire mortgage?

Yup. There are two exemptions available: one to extend the 3.5 rule up to 4.5, the other to drop the 20% after 220,000 rule to 10% for the total amount.

Whether you'll get an exemption or not is another story but yes, it does exist.

slowjoe17

Flatzie_poo wrote: »

That's not the case. They have more exemptions in January 2016 than November 2016. a stronger applicant in November compared to one approved in January, could be rejected due to the number of exemptions available. That's why I don't agree with a limited number of these.

This is a weakness of the regulations.

What the regulations _should_ say is that the number of exemptions in any given rolling 12 month period should not exceed some limit. It sounds like there is a per-annum limit based on the calendar year.

Smiley012

slowjoe17 wrote: »

This is a weakness of the regulations.

What the regulations _should_ say is that the number of exemptions in any given rolling 12 month period should not exceed some limit. It sounds like there is a per-annum limit based on the calendar year.

Yes, there absolutely is.

Apparently one bank went over last year, and had to cancel a bunch of their AiP's which were exemptions.

I know of around 4 couples who have applied to have an exemption and get more than 3.5 times - I think one was only 3.8 times - and no one got one.

They're very very picky about who they give it too.