Are 100% mortgages the problem? Is LTV a symptom or a cause?

An article in the Independent yesterday pointed toward 100% mortgages being a significant attributer to the bubble, I would wager it was a symptom rather than a cause, the IBA meanwhile has called for all mortgages to be made on a non-recourse basis.

The good thing is that people and organisations are trying to find a way to avoid a repeat of the property bubble, and they are not one off events as the UK can testify.  There are however, significant factors contributing to what happened.

1: lenders didn’t price risk, they didn’t even ‘price at all’: Banks have utterly failed to do the job they were designed to do, namely that of profitable intermediation, we had huge amounts of competition on lending, that drove down criteria requirements and also compressed margins, then along came trackers, these had low margin price promises – Bank of Scotland brought them into Ireland and have since left. I spoke with a Bank exec. yesterday and he told me that his institution has €16bn in trackers at an average rate of 2.1% and cost of funding is 2.3%, that is a critical error. The other issue is that ‘risk’ wasn’t considered relative to LTV, while there were some bands on trackers that were LTV based, the 100% mortgage was in complete denial, they were the riskiest loans and yet they didn’t have lending charges far above loans with 85% LTV. You can’t expect people to do the pricing for you, banks should have done their job and they didn’t.

2. Insurance should be mandatory: We have mandatory life assurance with mortgages in Ireland and yet death is the least likely event during the term of a loan, unemployment, accident or sickness are far more likely. This would be akin to insuring a car but only for fire. Mandatory insurance should be of the type that covers these likely events as well, and a waiver should only be available at low LTV’s.

3. Recourse is wrong in Irl so even 110% is fine for the bank: In Ireland your gearing doesn’t matter, the recourse to the loan is with the individual to the bitter end, in that respect the call for non-recourse mortgages is well founded, but on another hand – it won’t fix the present problem nor will it prevent a bubble it will merely increase the price of mortgages and encourage reckless consumer behaviour. There is a belief that ‘it works that way in America’ and I can tell you in short, no it doesn’t. The USA is divided amongst judicial and non-judicial foreclosure states and that means vastly different results when they foreclose on you. We also don’t want it ‘like the Americans’ in every sense, in the US if you fail to insure your property they’ll initiate foreclosure on you, that would go down like a lead balloon in Ireland.

4. Higher LTV facilitates home ownership: Putting restrictions on LTV’s is not the answer, but perhaps having banks put aside a higher capital cushion for every loan that is over 75% would be of benefit, then they can price risk accordingly and behave in a competitive fashion without regulatory nooses.

5. Low LTV doesn’t protect against unemployment – it’s a life stage relation, in the 80’s they didn’t have as high price/ltv but rates were high and as a percentage of income mortgage payments were still as high. property is expensive, it’s meant to be. Many of the ideas have merit, but it isn’t as simple as stating that one fix is the ultimate solution, rather it is many fixes working together that is required, the single greatest oversight is that of a site value tax – that alone would perhaps solve more problems than any other idea put forward to date.

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