Coldwell Banker Estates

Monday, 29 March 2010 16:17

AIB is to increase its variable interest rate for mortgage holders by 0.5 percentage points from close of business today.

The bank is also increasing its fixed mortgage rates. Tracker rates will not change. The standard variable rate for owner occupiers goes up from 2.25% to 2.75% (APR 2.79%).

AIB said the cost of money on the international markets remained high, and it was not sustainable for the bank to continue to provide mortgage at rates that were below those it was paying to borrow money

Earlier this month, when the bank released its financial results, its managing director Colm Doherty signalled that mortgage rates would have to rise, describing the current retail banking environment in Ireland as ‘quite dysfunctional’.

Earlier this year, AIB told brokers that it would no longer facilitate those wanting to switch their mortgages from another financial institution.

‘We understand the financial pressures faced by many existing and prospective home owners and we will make every effort to keep rate increases to a minimum,’ said AIB general manager of product development Michael Crowley.

AIB currently has €27 billion worth of mortgage loans, with 64% of its mortgage customers owner occupiers.

60% of AIB mortgages are trackers, 30% standard variable and 10% fixed rates. The standard variable rate increase amounts to €25.88 per month per €100,000 borrowings over 30 years.

RTE.ie

The Irish Times – Friday, March 26, 2010

ECONOMICS: Irish mortgage borrowers continue to benefit from incredibly low interest rates, writes PAT McARDLE 

THE TRADITION of home ownership in Ireland is strong, and successive governments facilitated it in a variety of ways, not least via mortgage interest tax relief.

The extent of this was such that a few years ago the OECD concluded that we had one of the most tax-friendly housing environments in the world. It was not meant as a compliment.

The special treatment of mortgage borrowers extended to the regulatory sphere.

When the financial regulator was set up, a specific post of director of consumer affairs was established. Banks had to get the director’s approval for increases in fees and charges, a practice that existed in only one other country, somewhere in Africa.

In addition, there was a succession of new entrants into the mortgage market, with banks from Britain, Denmark and the Netherlands all appearing during the Noughties.

Competition became intense with up to a dozen active retail lenders, a bloated broker sector which promoted switching from one lender to another and Irish mortgage rates that were among the lowest in the euro zone.

In short, the dice were loaded in favour of the borrower.

The introduction of 100 per cent mortgages and tracker mortgages at spreads over ECB rates that were clearly loss-making became the norm. The equivalent would be for retailers to treat all food sales as loss leaders and, moreover, to enter into contracts to continue the practice for the life of a typical mortgage, frequently 30 to 40 years.

Now the banks are stuck with these contracts in the same way that tenants are bound by upward-only rent reviews.

Presumably Central Bank governor Patrick Honohan’s report on banking will tell us how this was justified by the banks and why the prudential side of the regulator, a poor cousin of the consumer side with no director at board level, accepted it.

The favourable treatment for borrowers continued after the crisis broke.

The ECB responded to the emergency by reducing its key interest rate by 3.25 percentage points; the Irish banks covered by the guarantee lowered their standard variable rates by an identical amount, with the active encouragement of Government it would appear. In so doing they copper-fastened a loss-making situation.

Ulster Bank and ACC, by contrast, took a more hard-nosed approach and restricted their cuts to 2.25 percentage points. Subsequently, some of the covered banks have had to reverse tack, with more likely to follow.

On the whole, however, Irish mortgage borrowers still benefit from incredibly low interest rates.

The portion of the 1.9 million people still in employment who are mortgage holders has benefited enormously from the fall in interest rates. Affordability, as measured by the proportion of after-tax income required to service an average mortgage, is now back to levels last seen in the mid-1990s, enabling them to pay down debt and/or increase savings.

Those who have suffered severe income reduction or are no longer employed are in a much more difficult position.

According to the financial regulator, there are almost 800,000 mortgage loan accounts of which 28,600 or 3.6 per cent are in arrears for more than 90 days. However, unlike Britain or the US, the escalation in arrears has not, so far, led to widespread repossessions.

Instead, the Code of Conduct for Mortgage Arrears, which traditionally stayed lenders from initiating legal action for six months, has been extended to 12 months. However, this merely postpones the problem, which is set to get worse over the next year.

Recently the Government announced the establishment of an expert group to examine the matter. Its terms of reference are based on the Renewed Programme for Government and include legal reform plus an examination of measures to assist those in mortgage arrears “with reference to the measures adopted in other jurisdictions”.

The programme has examples of what might be considered, including:

• reduced rates;
• longer maturity dates;
• rolling-up of outstanding interest;
• lenders taking equity in the house;
• lenders taking ownership and leasing back the property to the resident, with rent payments coming off the loan.

It remains to be seen to what extent these will figure in the recommendations.

Meanwhile, it is illuminating to look at the experience abroad.

There is a variety of approaches from country to country. Banks offer repayment holidays of up to six months, reduced repayments, interest-only loans and, in some cases, job-seeker support or even shared equity. The Government programme, in effect, lists the measures found elsewhere. The problem is who will pay for them.

Britain has schemes to assist financially those at risk of repossession but they are typically of short duration. It also has a deferred mortgage scheme which lasts for two years, following which interest is rolled up and new repayment terms agreed. If the borrower defaults, the government recompenses the bank for 80 per cent of the interest due.

In Spain, the unemployed can defer half their monthly mortgage payments for up to two years and still claim tax relief on the full amount.

The US and Britain also attempt to avoid repossessions by allowing borrowers to rent back their homes in certain circumstances.

There are many approaches but no easy answers. In the end the cost of assisting distressed mortgage holders is usually shared between the taxpayer and the banks.

We are unlikely to be any different.

By Charlie Weston Personal Finance Editor

Tuesday March 16 2010

THE average first-time buyer is facing another 10 years before they will get out of negative equity, a leading housing economist has calculated.

And second-time buyers who bought in the past six years are likely to be stuck for another six years in a situation where the value of their home is worth less than the mortgage, a new report from the ESRI’s Dr David Duffy indicates.

One out of every three homeowners with a mortgage could be in negative equity by the end of the year if property prices continue to fall sharply.

The average household in negative equity owes €38,000 more than the home is worth.

Facts and figures in the report point to the housing market being stuck in a dispiriting deadlock from which it will take years to emerge.

Rising

The report, seen by the Irish Independent, calculates that the numbers in negative equity doubled to 116,000 by the end of last year. This represents one in five households with mortgages.

By the end of this year the numbers could hit 196,000, or one-in-three mortgage-holding households. This is based on house prices falling by 30pc from the peak of early 2007.

They are expected to fall by 14pc this year, and another 5pc next year. Prices are then expected to stabilise in 2012, according to the Economic and Social Research Institute (ESRI).

But if they fall by 50pc by the end of this year from the peak in 2007, as many commentators expect, then as many as 350,000 homeowners could end up in negative equity, according to the policy paper ‘Negative equity in the Irish housing market’, published in the ESRI’s spring review.

Those most likely to be in negative equity are first- and second-time buyers who bought in the last six years, with a mortgage that was close to the value of the property.

The total value of the shortfall — the amount by which the mortgage is greater than the value of the home — will hit a staggering €7.4bn by the end of this year, Dr Duffy writes.

This works out at an average of €38,000 per home for first and second-time buyers who bought in the last six years.

For first-time buyers who borrowed 92pc or more than the value of the property, the average is €41,000.

“First-time buyers with a high loan-to-value ratio will not move back into positive equity until after 2020,” the report says. Asked to expand on the report, Dr Duffy said that a new buyer who took out a 100pc mortgage in 2006 will end up with a house that is worth less than they borrowed for the next 12 years.

The policy paper, an update of an earlier one back in October, demonstrates that loose lending during the boom was largely responsible for pushing thousands of homeowners into negative equity. Interest-only mortgages, 100pc mortgages and 30 and 40-year mortgages all contributed significantly to overheating the market.

- Charlie Weston Personal Finance Editor

Irish Independent

The Irish Times – Monday, March 15, 2010

MORTGAGES : Despite the banks’ PR guff to the contrary, securing a mortgage has become incredibly difficult these days

‘WE SAY ‘yes’ to 100 mortgage applicants daily,” proclaims Bank of Ireland in its current home loans advertising campaign. Well that’s a relief. And to think, we thought that the banks were effectively closed for business (despite the €7 billion of taxpayers’ money pumped into AIB and Bank of Ireland), when all the while this one benevolent institution has been making the dreams of 100 aspiring homeowners come true every single day.

Or has it? This wouldn’t be just another clever piece of spin to appease taxpayers, would it? And just what kind of hoops do people have to jump through to get a bank to give them the cash to buy a house?

Talk to any mortgage broker and it quickly becomes clear that Bank of Ireland’s slogan does not even come close to reflecting the reality of what’s happening on the ground. “This, in my view, is very much a cynical PR exercise by the banks to somehow curry favour with the public and the Government [and imply] that they’re lending money to any first-time buyer who wants to buy,” says Michael Dowling of the Independent Mortgage Advisers’ Federation. “The reality is that they’re very much cherry-picking customers they want, and if they have any excuse not to lend to someone, they will not lend.”

Bank of Ireland may very well be approving 100 mortgages every day, (which would equate to about 26,000 mortgages a year), but the implication that mortgages are flying out the door is misleading. This top-line statistic refers to the number of mortgages approved in principle (between February and September 2009), as opposed to those actually drawn down, which is a much more accurate gauge of the bank’s lending activity.

Bank of Ireland has refused to divulge the number of mortgages drawn down during this period to The Irish Times , claiming the information was “competitively sensitive”. However, it did confirm that almost €750 million of its €1 billion dedicated First-Time Buyers’ (FTB) fund launched last March has been drawn down.

This may seem like a huge sum but it’s not. The average FTB home loan is about €200,000 so it translates into just 3,750 mortgages since the fund was launched. This in turn works out at about 14 FTB mortgages drawn down per day.

Given that FTB mortgages account for more than 35 per cent of the overall mortgage market, we can extrapolate that a grand total of just 40 mortgages (including top-ups, remortgaging, mover-purchasers and investment mortgages) were actually extended by Bank of Ireland to borrowers per day over the last year.

In Dowling’s experience, out of 100 approvals in principle, only about 50 of those make it all the way through to loan completion stage. There are several reasons for this. Many people who have received mortgage approval in the last year or so have held off from buying a property in the expectation that prices will fall further.

Also, if an individual’s circumstances change between getting approval in principle (which is not legally binding, and is only valid for three months) and drawing down the mortgage – for example, their employment status changes – that approval could be withdrawn.

Another trend observed by brokers is that lenders – including BoI’s broker chain ICS Building Society – will approve a mortgage applicant for a significantly lower loan amount than they need to make a purchase. For example, an individual might apply for a mortgage of €280,000 to buy a house costing €320,000 but will only be approved for €240,000. This will be recorded as an approval by the bank, but from the customer’s perspective they have effectively been declined.

This “makes for great copy”, says Karl Deeter of Irish Mortgage Brokers, but the loan “isn’t going to go anywhere”.

The reality is that banks have a restricted amount of cash to extend in new mortgage business as they are trying to shore up their balance sheets, and therefore are picking only the crème de la crème of applicants by tightening up their criteria.

So who is the “dream candidate” these days? According to Dowling, there are two sets of dream applicants. Firstly, those in medical professions, such as doctors, consultants and dentists, ideally if they have permanent jobs in the State sector. Civil and public servants are also viewed favourably, despite the pension levy introduced last year, because they are deemed to have guaranteed employment.

Anyone who is not in full-time, permanent employment will quickly discover that they are persona non grata with lenders at the moment. Not surprisingly, anyone whose job is related to the construction industry – from builders and tradespeople to architects, engineers, solicitors and estate agents – also is likely to find their applications rejected. Even employees of banks themselves will now find it difficult to get a mortgage, because of the number of redundancies expected to come down the tracks in this sector.

However, having a “job for life” (or as close to it as is possible these days) and a large income is no longer enough in itself. Prospective lenders now forensically examine bank statements for proof that the applicant is in the habit of regularly saving an amount roughly equivalent to what their mortgage repayment would be.

Lenders also look for “stress items” – such as referral fees for exceeding overdraft limits, or even large credit card bills being paid every month – which could “disbar” that person from getting a mortgage, Dowling says.

Interestingly, if it is evident from the person’s bank statement that the applicant gambles on a regular basis, this is counted as a monthly “loan repayment” when working out that person’s repayment capacity. Another potential hurdle to getting a mortgage is the fact that financial support from generous parents is no longer being taken into account.

Aspiring FTBs who are fortunate enough to receive a gift from their parents to cover their deposit (which must now be at least 8 per cent of the value of the property) find that lenders want proof that they have been able to save up an equivalent amount themselves. Furthermore, lenders are no longer taking rental payments into account when calculating whether an individual can afford a mortgage. In the past if the person was paying, say, €900 in rent each month, banks would take into account the fact that this amount would be freed up to pay their mortgage, but this is no longer the case.

“Lenders should be prudent in their lending but I do think they should take into consideration things they don’t such as rent, or a gift from parents,” says Rachel Doyle of PIBA.

When it comes to the strictness of their mortgage lending criteria, it seems that banks have gone from one extreme to another. Whether they have gone too far is open for debate, but one thing is for certain – regardless of what impression the banks are trying to create, getting a mortgage has become an incredibly difficult feat

SHOULD prudent homeowners who have been diligently meeting their mortgage payments rescue the reckless who now find themselves in arrears?

The question is posed by the formal announcement yesterday of a group of experts tasked with coming up with proposals to save heavily-indebted families from going to the wall and even losing their homes.

Energy and Communications Minister Eamon Ryan has been pushing for months now for an advisory group to be put together to propose solutions for those in arrears with their mortgages and other debts.

Mr Ryan and Finance Minister Brian Lenihan yesterday set out the terms under which the group was expected to operate and listed the members of it.

There can be little doubt that many families are heavily hampered by debt. The setting up of the group is a good thing as there is a definite need for it.

Some 20pc of families are in arrears on all sorts of loans, theCentral Statistics Office found before Christmas. More than 6,400 people have not paid their mortgages for a year or more, putting them in grave danger of losing their homes.

There are some 791,000 residential mortgages out there. Some 3.3pc of these, which works out as 26,000 homeowners, are in arrears for three months or more on their mortgages.

But flip those figures the other way, and what you get is the fact that 96.7pc, or 764,897 homeowners, are meeting their monthly mortgage repayments.

Undoubtedly there are thousands of genuine cases where families have got caught in a vicious debt spiral.

Those hit by what is known as an income shock — such as unemployment, divorce and/or illness — have found themselves unable to make their loan repayments.

Many of these people are the victims of reckless lending when banks, cheered on by the likes of former Taoiseach Bertie Ahern and the construction industry, pushed debts at people. Credit was extended without properly checking consumers’ ability to repay, the mortgage process was often speeded up so salespeople and lenders could maximise profits and commissions, and loans like credit card bills were often ignored when mortgage applications were being assessed.

But not everyone was sucked in by the hard sell of the banks and building societies.

Take, for example, how two different families reacted to the madness of the debt-fuelled days of the Celtic Tiger.

Let’s call them Sean and Sheila Sensible and Graham and Grainne Grabit.

The Sensibles resisted the best attempts of their banks to encourage them to overborrow.

Wise to the dangers of reckless borrowing, they bought their house during the boom. That meant they overpaid for it, but they were careful enough to ensure they had a good deposit and only bought a modestly sized house.

The Sensible family have struggled to meet their mortgages repayments and pay off their car loan and credit card debts during the downturn, but they have always managed to meet the repayments.

Contrast this with the situation that Graham and Grainne Grabit find themselves in. They bought a huge house during the boom, and later used the house as security to fund another mortgage to buy a holiday home in Spain.

Now in their 30s, they believed all the hype around the Celtic Tiger that made many people believe that the good times would roll forever.

As the value of the house rose during the boom, they repeatedly released equity from the home, using it as a sort of ATM to fund a lifestyle they otherwise could not afford.

Now that the downturn has hit with a vengeance, Grainne Grabit has lost her job, while Graham has been hit with a severe wage cut.

They have got themselves into arrears on their mortgages, are getting numerous calls every day from the credit card company because they are not clearing the balance, and have had to hand back the keys of their Range Rover.

But they are showing little evidence of altering their lifestyle. At Christmas, Grainne Grabit still shopped in New York and the children continue to attend an expensive private school.

The option of equity release, or using their home as an ATM, has been shut off to the Grabits by a combination of plunging property prices, which have pushed them into negative equity, and a marked reluctance by banks to approve remortgaging deals.

The situation the fictional Grabits find themselves in brings into sharp focus the dangers of the Government’s expert group on debt recommending solutions that reward recklessness.

The problem is that a homeowner rescue scheme, if it is too easy to quality for, could end up costing all of us.

If banks are forced to write off some homeowners’ debts then lenders may be forced to react by pushing up the mortgage costs for all borrowers.

Also, international ratings agencies are likely to downgrade the credit ratings of banks that are forced to write off debts.

Having said all that, it is true that our personal bankruptcy laws are archaic and unsuited to a modern economy.

Without large-scale reform, some experts have warned that we could end up with a generation of people unable to access credit and with a major stain on their personal credit record.

One solution may be to keep pushing out the term of the mortgage, so that the debt will still have to be paid back but the monthly repayment amount will come down sharply.

But each case will have to be assessed on its merits.

Otherwise, we risk rewarding reckless behaviour — something the majority will pay dearly for in the long run.

Printed in The Irish Independent 26.02.10

MORE THAN €60 million would be spent this year on the mortgage interest supplement, Minister for Social and Family Affairs Mary Hanafin told the Dáil.

She also said that the report of the review of the administration of the mortgage interest scheme would be published in April.

Its main purpose, she added, was to examine how the scheme could meet its objective of catering for those who required assistance on a short-term basis because they were unable to meet mortgage interest repayments on their sole place of residence.

“The group is examining trends in programme and administrative costs, the impact of the financial regulator’s statutory code of practice on mortgage arrears on the mortgage interest supplement scheme and legislative and operational issues including the cap on hours of employment,’’ she added.

“The review is also considering whether alternative approaches to achieving the scheme’s objectives are warranted in light of recent changes in the economic climate and the mortgage market.’’

Ms Hanafin said after consultation with the community welfare service, guidelines on specific and immediate operational issues for community welfare officers operating the scheme were finalised.

Fine Gael spokeswoman Olwyn Enright said not only were they waiting for reports from the review groups, but they were also awaiting the Taoiseach setting up the high-level independent group.

In the meantime, said Ms Enright, the Government should consider easing the mortgage interest supplement criteria so those who might benefit from the reviews, if anything was done on foot of them, did not lose their homes. “People are being refused mortgage interest supplement at the moment,’’ said Ms Enright.

“They are losing their homes because they cannot negotiate anything with their banks.’’

Ms Hanafin said it should not be ignored that a moratorium of 12 months had been established relating to all institutions covered by the financial regulator, including the subprime lenders.

Ms Enright said the Minister should go to the courts to see what was happening in the area of mortgage arrears. Labour spokeswoman Róisín Shortall said the Minister should set down guidelines for assistance payments.

Printed in theirishtimes.com on 24.02.2010

An expert group designed to help those struggling with personal and mortgage debt is likely to approved by the government this week and set up immediately. The group will issue recommendations on measures to assist those in debt arrears within months, government sources hope.

The proposal was included in the revised Programme for Government, and featured heavily in the efforts of the Green leadership to sell that deal to the party membership.

The Green leadership dubbed the proposal, ‘My Nama’.

However, there is some nervousness about the proposal in the Department of Finance It is concerned about the effects on Ireland’s already fragile banks of a wave of debt write offs for mortgage arrears. Recent comments on the matter by Green minister Eamon Ryan caused alarm among his government colleagues, who had not yet given their assent for the scheme.

Nonetheless, officials were preparing to announce the membership of the group and the terms of reference if the cabinet gives the go-ahead on Tuesday. It is believed that the group will make a series of recommendations on a regular basis, rather than producing one report in six months’ time, one source suggested.

A group of civil servants from various government departments – the Interdepartmental Mortgage Arrears Review Group – already exists, though Green ministers believe that an independent group is more likely to make progress quickly. Some government sources, however, remain sceptical that widespread debt restructuring is either possible or advisable. There is more likely to be agreement on the regulation of debt collection agencies, new rules governing bankruptcy and the establishment of a new debt enforcement office.

The Programme for Government suggested a number of options for those in mortgage arrears. These included reduced interest rates, longer maturity dates, the rolling up of outstanding interest, banks taking equity in houses and the banks taking ownership of the house and leasing it back to the borrowers, with rent payments coming off the loan.

Printed in Thepost.ie (The Sunday Business Post Online) on 21.02.10