A TWO-month review of the lending practices of some seven banks and building societies, conducted by the Central Bank and the Financial Regulator, has strongly criticised how they have sold first-time mortgage policies. In a depressed market, it found that lending to first-time buyers accounted for almost 40 per cent of new mortgages in individual banks.
And it was critical of the “herd” mentality apparent in bank lending to this sector. Banks adapted their lending practices in response to their competitors’ actions, and failed to use more robust and reliable measures of risk. A similar flawed strategy was a major feature of the banking crisis, where Anglo Irish Bank set a reckless lead in property lending which the other major banks later matched.
The Central Bank review noted an improvement in lending standards by banks, with some tightening of controls in assessing loans. But it insists more needs to be done and has promised to adopt a more intrusive approach in monitoring banks’ lending practices. In particular, the Central Bank was critical of the limited role played by non-executive directors in assessing and challenging new mortgage lending policies. And it has suggested that bank boards in their oversight role should be more assertive in ensuring that internal financial controls are adequate.
Where banks fail to control risks, the Central Bank has warned it will intervene to impose standards and to put safeguards in place. These measures could range from fixing a loan-to-value ceiling, setting a cap on loan-to- income-multiples, and limiting the term of new mortgages. Were the measures now proposed in place sooner, then some of the worst excesses of the property boom might have been curbed and the financial crisis limited, both in scale and duration.
The Central Bank will follow up its review with individual banks to ensure they have introduced appropriate controls on mortgage lending. All of which may well make it more difficult for first-time buyers – given tighter lending criteria by banks – to secure a loan. But the absence of such controls in recent years contributed to an unsustainable property boom and a banking crash that has left too many borrowers in negative equity – where the value of their home is less than their outstanding mortgage debt.
The Central Bank, with its proposals, is putting in place some strong and long overdue safeguards for mortgage lending. These will protect and serve the interests of borrowers and lenders and help ensure that history is not repeated.