Irish banks failed to take out insurance on mortgages
Irish banks failed to take out insurance to protect themselves against losses on their mortgages, increasing the cost to taxpayers of rescuing them, the Irish Independent has learned.
The Central Bank has confirmed that the failure of most Irish banks to take out mortgage insurance was taken into account when it decided on their capital levels, announced in September. There are about €148bn of mortgages outstanding in the Irish market.
It has now emerged that foreign lenders, including KBC, have Irish mortgage insurance in place, giving them some level of protection if losses escalate. Most of the Irish banks do not have insurance in place, although EBS is an exception.
AIB confirmed last night it does not have insurance in place to absorb losses and Bank of Ireland is believed to be in the same category, although it declined to comment on its "risk management'' yesterday.
Mortgage indemnity insurance means that an insurer absorbs the losses on some portion of a loan that turns sour. Banks usually use it for loans with high loan-to-value ratios, meaning that if a loan is not repaid, about 25pc of the loan is shifted on to an insurer.
The Central Bank said: "Yes, the Central Bank of Ireland is aware of this and it was given consideration under the prudential capital assessment review (PCAR).''
KBC, the Belgian bank, has put in place insurance for loans with a loan-to-value of 75pc to 80pc with a "third-party insurer''. The insurance was put in place for loans approved right up until the start of the property crash, the bank's filings show.
Irish banks used to ask customers to take out compulsory mortgage insurance but this practice was abandoned at the height of the boom by most lenders. The banks also abandoned taking out insurance funded from their own resources, although EBS has stuck with this practice.
"It was just one of those things cast aside so that margins on loans could be maintained,'' said an analyst. He added that, with unemployment now so high it could be difficult for banks to get fresh insurance at economical prices.
September's PCAR exercise placed heavy emphasis on the potential for rising mortgage losses at the banks over the next two to three years. While arrears levels in some mortgage pools are over 7pc, the overall level of arrears is much lower. But stock market analysts have been increasing their forecasts for mortgage losses.
A rise in ECB base rates, potentially late next year, is the biggest threat to bank mortgage books. A rise in these rates will hit tracker mortgage holders, many of whom took out their loans in the last few years of the boom when prices were at their highest and deposits at their lowest.
In September Finance Minister Brian Lenihan outlined a series of capital injections into the banks. He told the markets that AIB would now need €10.4bn of fresh capital, more than €3bn higher than previous estimates.