In recent days the IBF came out with a very positive story about how mortgage lending has increased year on year for the first time since 2006, at the same time the Central Bank are saying that criteria is tightening and other research suggests that almost HALF of our residential market is transacted in cash!
This is a classic example of two stories that contradict each other, or at least that seem to do so. Can you have tightening criteria with more lending? Of course you can! Demand for mortgages is up year on year (in our brokerage taking gross leads as the figure) about 30% or more.
Banks are saying that they accept the vast majority of mortgage applications (c.62% is their estimate), and the likes of AIB are actually ahead of target for the years mortgage lending (they estimated in 2011 they’d do c. 800m, they are on track for 1-1.1bn) and yet the accusations prevail that banks are not lending.
First of all, we should consider a few things that are not in the figures:
1. Mortgage broker figures are not taken into account, this is for ‘direct channel only’ applications, this strips out about 30-40% of the market, drastically reducing the sample size.
2. Where broker figures are taken into account, we know from experience that an application doesn’t cross into an underwriters hands without being looked over by a broker consultant first, meaning the majority of rejections occur without an actual application occurring.
3. Full applications are needed to get to underwriting where the metric comes from, and again, even on the direct channel, a preliminary decision quite often comes with a set of payslips, p60 and bank statements. If the person doesn’t submit other factors like the ‘know your customer‘ docs then an underwriter won’t see the case to reject but running a calculator will do this for the person in the branch and again mask the figures.
The truth is that there were far more than 28,500 applications – because the alternative is that Irish Mortgage Brokers represents about 15% of the market and that just isn’t the case as much as we’d like it to be! In short, the claim that banks are capable of lending to the figures the market demands is hogwash.
The increased numbers in lending are a result of pent up demand as households build irrespective of economic conditions, and the ability to cherry pick the best applications. Which is why we don’t flinch when we see the likes of AIB tighten criteria as they did just now.
In AIB’s defence we should explain what is happening, they are increasing their ‘stress test’ rate on lending. If you had two applicants earning €40,000 a year two months ago they’d qualify for a loan of €409,000 the same applicants today they could obtain €397,000 or about 3% less.
That 3% reduction is due to a 0.25% increase in the stress tested rate from 6% to 6.25%, and came about as a result of the SVR increases they implemented. Their rule was to stress at 2% above the SVR, what was happening prior to this was a stress at 2.26% above the SVR, they raised rates 0.5% and are now only increasing the stressed rate to 6.24% (the SVR being 4.24%) meaning they are right in line with their own criteria.
What it does mask – because this can be seen as a concession (by not going up 0.5%) – is that they were ‘overly stressing’ loans up to now while claiming they were lending and doing so on all viable cases, that can’t be true at the same time as over-stress testing loans, the two stories are incompatible.
Secondly, is that yet more people will be locked out of lending on the amounts they hope to achieve because outside of the stress test there are a host of other repayment calculations that are bringing down the loan amounts (children etc. are all put in as expenses and accounted for in a standard manner not taking into account what actually occurs in your expenditure).
The absence of competition is allowing rates to rise, that isn’t a bad thing, what is bad though is the rise (as pointed out by the Central Bank) of inhibiting criteria as it means fewer will be able to obtain credit. This cycle has to end at some point, but short of a new lender or a serious change in credit availability generally, lending will remain understated for the next 12 months at least.