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Consumers did not understand risks of getting large mortgages

CONSUMERS did not understand the risks when they took out large mortgages at the height of the property boom, the Nyberg report found.

And banks failed to properly work out what would happen if borrowers got into financial difficulty.

But the report argues that banks cannot be held responsible if mortgage borrowers default on their loans.

The report referred to the development of a "national speculative mania" in Ireland during the property boom. It said neither banks nor borrowers really understood the risks they were taking.

The report argues that the introduction of tracker mortgages and 100pc home-loans for first-time buyers contributed to the crisis. These products allowed consumers to borrow more than if they were taking out traditional variable mortgages.

The report said both borrowers and banks failed to understand the risks they were taking on, causing loans to expand rapidly.

There was a "fundamental flaw" in the design of tracker mortgages. These are mortgages where banks commit to charge borrowers a set margin, usually 1pc above the European Central Bank (ECB) rate.

Banks mistakenly assumed sufficient funding would be available in the longer term at or near ECB rates to fund low-priced trackers.

When the banks' actual cost of funds increased to well above the ECB rate in 2007, they were unable to pass these costs on to customers.

Tracker mortgages account for more than half the mortgage books of AIB, Bank of Ireland and Perm-anent TSB, and 20pc of the mortgage lending of EBS.

The entry of foreign owned lenders also played a big role in overheating the market, the report found.

Bank of Scotland came into the Irish mortgage market in 1999 and Ulster Bank took over First Active in 2004.

"The foreign-owned institutions competed aggressively with the domestic players for market share offering not only more attractive terms but also new residential mortgage products," the report found.

These products included high loan-to-value mortgages, some as high as 100pc, along with interest-only mortgages and more tracker mortgages.

"These new products, however, also posed new risks for both the borrower and the lender."

Irish Independent