First-time buyers set to face stricter mortgage criteria

FIRST-TIME BUYERS look set to face stricter criteria in securing mortgages. The Central Bank said yesterday it is to impose stringent rules on banks that fail to have adequate lending practices in place.

In a report on the first-time buyer mortgage policies of Irish banks and building societies published yesterday, the Central Bank lists five measures that may be undertaken in the event that a bank is found to have inadequate safeguards in place.

These are:

Imposing a loan-to-value ceiling

Capping loan-to-income multiples;

Limiting the term of new mortgages;

Removing room rentals as a criteria for mortgage assessment;

Imposing income verification procedures, including contacting employers to verify an applicant’s income.

Yesterday’s review is the first report to be published since the launch of the Central Bank’s strategy last month which promised an era of “more intrusive” banking regulation and supervision.

While any measures would require legislative changes, it is understood that the newly restructured Central Bank, which is to merge with the Financial Regulator, will be given wide-ranging regulatory powers.

A series of legislative amendments are now expected to be introduced in the autumn as part of the restructuring of the institution.

The policies of seven banks and building societies were examined for the review, which was undertaken over the last two months.

The report found that despite limited activity, lending to first-time buyers still accounts for almost 40 per cent of new mortgages in individual banks.

While the report found that some progress has been made to improve lending standards, it was sharply critical of the lending policies of Irish financial institutions.

In particular, it criticised what it called the “follow-my-leader” approach to mortgage strategy, which saw banks adapting their strategies in response to a competitor’s actions.

“All banks are expected to ground their lending in strategies appropriate to their risk appetite rather than the direction of the market as a whole,” the report states.

The review also criticised the absence of “robust and reliable risk measures” at Irish financial institutions with regard to mortgage-lending decisions.

According to the Central Bank, pricing decisions for new mortgages tend not to take account of detailed or reliable measures of risk such as risk-adjusted return on capital (“Raroc”) calculations, which can lead to “a lack of sophistication in pricing”.

The role of non-executive directors is also highlighted, with the report criticising the “limited involvement” of non-executive directors in assessing, scrutinising and challenging new mortgage-lending policies.

“We observed little evidence that non-executive directors provided challenge that led directly to changes in policy or pricing.

“As mortgage lending is a key business line for Irish banks, we would have expected to see greater, and more robust, discussion of assumptions underlying policy and pricing changes,” it continues.

The review recommends that the board is presented with a clear mortgage strategy, including risk appetite and profitability, that is critically reviewed and challenged by the board at least annually.

In addition, the board should receive quarterly reports from the risk committee which monitors new lending policies.

Other recommendations contained in the report are that banks increase the frequency of credit reviews.

The importance of valuers panels in the valuation assessment process is also stressed.

While panels for valuers existed in most banks, not all institutions engaged a panel, the report found.

The report states that each financial institution should appoint a panel of valuers and introduce clear guidelines on necessary qualifications and experience, including some requirement that a valuer hold professional indemnity insurance.

The Central Bank said yesterday that it would be monitoring banks’ adherence to the guidelines over the coming months and any follow-up action would be undertaken on a bank-by-bank basis.