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Sunday Mon€y Comment - May 18, 2014

Posted by Jill Kerby on May 18 2014 @ 09:00

MORTGAGE INDEMNITY BONDS ARE A GOOD IDEA, JUST NOT PAID FOR BY THE TAXPAYER

It’s only one of many proposals in the Construction 2020 Strategy for Ireland, but the government’s idea of committing the taxpayer to pick up a potential negative equity bill for the next generation of first time buyers has hit such a brick wall of incredulity that many are now suggesting if will be quietly withdrawn.

This monumentally stupid idea involves first time buyers purchasing newly built houses with just a 5% downpayment and the taxpayer, via a mortgage insurance dictat by the Department of Finance, providing a balancing 20% negative equity guarantee to the lender. 

Once upon a time, this insurance was commonplace and it was purchased by buyers who borrowed more than 75% of the asking price of their home. It was  known as a mortgage indemnity bond. (MIB)

This is a definition of the bond from the 1999 edition of my book, The TAB Guide to Money Pensions & Tax:

“If you borrow more than 70%-75% of the value of your home, you may also have to buy a mortgage insurance bond from the bank or building society. These bonds guarantee the total repayment of your loan in the event of your home being sold for less than the outstanding loan amount. Indemnity bonds usually cost 3.5% of your borrowings above the specified limit and, while the cost can be absorbed into your 20 or 25 year mortgage term, it is more cost effective over the longer term to pay it all at the offset.”

Mortgage insurance bonds were already going out of fashion by 1999. The Celtic Tiger property boom was already established by then and with taxes falling, employment, wages and productivity rising and generous mortgage interest relief and first time buyer grants, the banks and building societies were already loosening their lending criteria. 

By 2002, after the massive post 9/11 credit stimulus from central banks, just about anyone with a beating pulse could raise a 100% mortgage for a home and even investment properties. The pimply-faced youth recruited to sell mortgages by the banks and mortgage brokers’ had never heard of MIB’s and old timers who worked beside them were too busy counting their commissions and bonuses to give this prudent tool a second thought.

Given that we live in one of the most debt burdened states in the world and the price of the average home in Dublin is over €399,000 or 10 times more than the average industrial wage, is a 20% - 25% mortgage indemnity bond requirement a good idea?

I think so.  But the buyer should be required to pay for it, not the taxpayer and that means a higher down payment and that might discourage some buyers, which is the last thing the government wants.

The government claimed last week that this mortgage subsidy is all about helping first time buyers get on the property ladder by lowering the bank’s lending risk and buyers’ well-founded fears of negative equity.

Dear, oh dear.

If that really is its motivation it only shows that government policymakers have learned nothing from the property bust and its causes – artificially cheap credit, over-lending and a disregard for its inevitable consequences.

The Construction 2020 document, suggest political commentators is nothing more than trying to boost construction employment and even more cynically, to boost house prices. (More mortgage money chasing inadequate supply is sure to push up the price of any newly built home in the Dublin area.)

Higher property prices, on paper at least, lowers the negative equity value and makes the bad loans the banks are holding look a lot better to EU stress testers and the bond markets.  Outwardly,  “recovering” property prices suggest a recovering economy.

Anyone who was burned by the boom knows better.  We can only hope that the under 30s, the only cohort untouched by the property debt fiasco that began more than a decade ago will see this latest ‘stimulus’ proposal for what it is:  a cynical exercise in driving them into a lifetime of over-indebtedness.

 

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  • Jill Kerby is one of Ireland’s best known personal finance journalists 

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