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Banks under fire for taking risk on first-time buyers

LESSONS of the past decade have not been learned, according to the Central Bank which has criticised the lending practices at the country's banks.

The Financial Regulator and Central Bank have criticised the institutions for offering mortgages to first-time buyers who were not properly assessed.

Many of these borrowers are now trapped in negative equity on their home loans.

A review by the Central Bank and the Financial Regulator found banks need to improve lending standards for first-time buyers.

It said while some progress is being made to improve lending standards and oversight, more can be done to improve practices.

It said there are concerns that, in some instances, banks are not utilising "robust and reliable" risk measures when developing new mortgage lending strategies or products.

All banks are expected to ground their lending in strategies appropriate to their risk appetite rather than the direction of the market as a whole. A 'follow my leader' approach to mortgage strategy has not served banks or their borrowers well in the past, the Central Bank said.

The Bank has warned that measures could be taken on a bank by bank basis if it was not satisfied that adequate safeguards existed for mortgage holders.

According to the Central Bank, pricing decisions for new mortgages tend not to take account of detailed or reliable measures of risk such as risk-adjusted return on capital ("Raroc") calculations, which can lead to "a lack of sophistication in pricing".

The role of non-executive directors is also highlighted, with the report criticising the "limited involvement" of non-executive directors in assessing, scrutinising and challenging new mortgage-lending policies.

The report states that each financial institution should appoint a panel of valuers and introduce clear guidelines on necessary qualifications and experience.

The Central Bank has listed five recommendations for banks who are lending to first time buyers including; imposing a loan-to-value ceiling, capping loan-to-income multiples, limiting the term of new mortgages, removing room rentals as a criteria for mortgage assessment and imposing income verification procedures, including contacting employers.