Home truths: Rebuilding Ireland loans: caveat emptor
In 2015, in a cliché ridden metaphor involving stable doors and bolting horses, the Central Bank introduced new rules for mortgage lending, capping the amount borrowers could tap banks for (and, more importantly, capping the amounts banks could tap borrowers for), by setting firm loan-to-income (LTI) limits.
In settling on 3.5 times gross income, this fairly sensible and obvious measure has the immediate effect of ensuring no more than a third of a person's salary would be spent on servicing mortgage debt. This figure is widely accepted elsewhere as a prudent fiscal approach. In the US for instance, the 2010 Dodd-Frank Act forbids banks from lending at limits which demand more than 35pc of the borrower's income to repay, but in reality, lenders tend to keep a lid at no more than 28pc.
With an average income of $55,000, this means $1,283 pm on home loan servicing. It's a tight call, but it reflects the non-recourse lending standard in many states, where the bank takes the hit if it gets the sums wrong; it carries the can on the defaulted debt, which makes the bank naturally cautious.
The LTI measure was reviewed in 2016, and again in 2017 and a minor tweak was made to allow up to a fifth of first-time buyers borrow more than 3.5, at the lender's discretion. This keeps the guard and the nurse in line, but lets the doctor and dentist punt out more on account of their 'prospects'.
"The measures are designed to ensure that banks and other lenders lend money sensibly," sniffed the Central Bank of Ireland at the time. "They are also designed to stop house buyers from borrowing more than they can afford and prevent excess credit from building up within the Irish financial system."
Good stuff. 'Keep Calm and Carry On' seemed to be the message as a future lending crisis appeared to recede. Enter stage left a Government in need of a press release.
Beleaguered by its utter failure to solve a basic problem of providing enough houses for its population, a lightbulb operated by knee jerk resulted in a new plan being introduced which (a) did nothing to address the supply issue but (b) acted successfully as a "Oh look over there!" distraction.
The 'Rebuilding Ireland' document is a fine thing. No cynicism there, it really is. Its aspirations are clear and hopeful. The funds and will backing it, clear and unambiguous, for the most part. There's even a website with friendly graphics.
But a clanger on the first page belies its true intentions: "Action Plan for Housing and Homelessness" it promises. While there is lots of stuff about both housing and homelessness, the key solution proffered is, instead, a new type of loan: the Rebuilding Ireland Home Loan.
The market is specific: a first-time buyer, earning no more than €50,000 who has been roundly rejected by at least two retail banks, by failing their stress tests and the Central Bank rules for home ownership. There's a word for these people, which isn't in the fancy document: Sub-prime.
It means you are not a prime candidate for a loan. You shouldn't have one. Two banks have said so. The Central Bank has said so, and you can't afford one anyway. It really couldn't be clearer.
But here's the jam: get those sound rejections and Ireland Inc will give you not two, not three, not 3.5 (the rule limit) of loan-to-income, but… drum roll please… 5.5 times your meagre income to buy a house. Underwritten by Joe and Mary Taxpayer, no less. For a home nobody prudent says you should be allowed borrow for.
"Sub-primes" were the adoptees of the Celtic Tiger; the unwanted borrower even at a time when banks were chucking money at people. The two biggies in the market were Start and GE Money, but even they only lent an average loan-to-value of 64pc. "Primes" could get 90 or 100pc. They still can.
Sub-primes default four times more often than Primes. One fifth of all loans in arrears currently are Sub-primes, yet they only make up a fraction of the market. The eventual purchasers of many of these dud loans, the likes of Lone Star and Cerberus, ended up setting aside millions of Euro for "unrecoverable" Sub-prime debts.
At the launch of the Rebuilding Ireland Sub-prime loan, Minister Eoghan Murphy said: "Home ownership is an important aspiration in a Republic of Opportunity.
"Opportunity is also about choice, and the Government recognises that some people want and need the flexibility that renting can bring. When more and more of a person's or a household's disposable income is going towards paying their rent or saving for a mortgage, or both, their opportunities are limited."
He didn't add that when more and more of a person's disposable income is going toward servicing an enormous loan it also limits their opportunities.
So the answer is to construct a yoke, place it around the neck of a borrower who hasn't the strength to carry it, and let the taxpayer walk beside him to take up the weight when he falls. He has placed €200m of our money in the yoke-making machine. Let's hope he knows something we don't.