Central Bank’s mortgage lending limits are ‘proportionate’

The Central Bank of Ireland's proposed new rules for mortgage lending involve "proportionate limits" on home loans, Sharon Donnery, director of credit institutions supervision told a banking conference in Dublin today.

Speaking at the Banking & Payments Federation Ireland’s national conference, Ms Donnery also called for Irish banks to act conservatively in the pace of loan provision write backs as the economy and the property market continue to recover.

On the new mortgage rules, which are set to impose strict loan to value and income thresholds on home loans, Ms Donnery said: “As the economic recovery gathers pace, a prudent approach to new lending is essential to avoid repeating past mistakes,” she said.

The purpose of the new rules was to improve the “resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and housing price spirals developing in future”, she said.

“The measures introduce proportionate limits and specific exemptions which take into consideration that there are some cases which could fall outside strict limits,” Ms Donnery added.

She acknowledged that there could be “some potential” for impacts on first time buyers. “However, it is also important to balance the needs of these individual borrowers with the resilience of the banking and household sectors overall.”

The Central Bank has proposed that borrowers be required to have a 20 per cent deposit when purchasing a property, with some exceptions. It is also seeking an income cap of 3.5 times for home loans. The bank has put the new rules out to consultation until December 8th.

On provision write backs, Ms Donnery urged caution by banks as the property market recovers.

“It is the role of regulators to ensure these assumptions remain an appropriately conservative reality,” she said.

“While there have been “improvements in certain key parameters such as house prices, there are still unreliably low levels of activity to have high levels of confidence in changing assumptions”, Ms Donnery said.

“The ability to write back provisions must be reflective of a conservative view and therefore the timing and extent of any write-backs must be balanced extremely carefully,” she added.

Ms Donnery said demands to bolster profits, reserves and capital cannot be allowed to “destabilise” the progress on debt resolution.

“It would be a significant backwards and destabilising step if a bank had to reverse course and re-recognise provisions in the coming years. We will continue to strongly challenge our banks to make sure that the appropriate balance is struck.”

Ms Donnery also warned that banks needed to be aware of the risks posed by e-commerce and new payments models.

“Banks whose IT systems are already under strain will need to make significant investment in upgrading or replacing their systems if they want to migrate to doing more of their business electronically or undertaking new forms of business.”

She said new products should not increase the risk of technology failures in existing services.

Ms Donnery said progress has been made in tackling mortgage arrears here but it “remains too slow”.

“There is cause for concern in the continuing increase in very long term arrears of over 720 days,” she added. “These now constitute almost 30 per cent of all accounts in arrears, and just over 70 per cent of the value of arrears outstanding.”

She said buy-to-let (BTL) mortgage accounts also continue to rise. “Significant supervisory effort is being directed at this area,” she explained.

“The BTL problem is significant. Many of the properties involved were bought late in the ‘boom era’ and are thus in deeper negative equity and need to be resolved with greater urgency.”

Ms Donnery noted that mortgage arrears make up one-third of the value of all distressed loans. Commercial distressed loans represent the reminder.

“Resolving commercial loans will take time as many of the restructures involve a business plan spanning a number of years, often involving a mix of debt restructure, trading recovery and some element of asset sales,” she said.