Regulators highly sceptical of negative-equity loans
THE prospect of banks and building societies launching negative equity mortgages was greeted with "extreme scepticism" by regulators yesterday.
The Irish Independent yesterday revealed Bank of Ireland, Irish Nationwide and Permanent TSB are preparing to launch negative equity homeloans, while Ulster Bank and EBS already provide such loans.
Negative equity mortgages would allow people to move house, despite owing more to their lenders than their current home is worth.
A negative equity mortgage would allow homeowners to sell their home and take the negative equity portion of the original loan on to a new mortgage.
But the number two in the Financial Regulator's office, Jonathan McMahon, said his organisation was concerned about the risks to consumers and to banks if these products became widespread.
"I think we would look at these products with some scepticism from two perspectives. One is the banks' own balance sheet. Does this make sense for them?
"And also from a consumer perspective -- clearly people taking on more debt and spreading that debt over a longer period of time would need to be scrutinised carefully."
Mr McMahon said regulatory staff needed to understand why lenders were introducing negative-equity mortgages.
He asked if providing such a product was about meeting a genuine consumer demand, or was it about banks making money from mortgage lending?
Mr McMahon, who is assistant director general for financial institutions at the Financial Regulator, confirmed lenders had been in discussions about launching negative-equity mortgages.
"Banks need to think carefully. If they do come out with these products, what are the potential future reputational risks?"
He added: "There may be a case for saying it can be done in a very targeted way."
Meanwhile, the regulator also confirmed it was considering imposing a cap on new lending where the mortgage represents a high proportion of the value of a home. This could mean a "damper" or cap on 100pc mortgages.
These mortgages were popular during the boom, but anyone taking out this type of mortgage was the first to go into negative equity.
The regulators are worried that at the moment "consumers' ability to get access to credit is largely unfettered". A discussion document on banking supervision issued yesterday notes there is no regulation of credit limits, by either restricting loan-to-value mortgage limits or by assessing the amount of disposable income a person is left with after meeting repayments.
However, legislation going through the Dail is expected to give regulators powers to set lending limits.
Also being considered is the setting up of a central credit reference agency which would keep data on the debts of every consumer. At the moment, information on consumers' loans is provided to the Irish Credit Bureau on a voluntary basis.