Money Times - May 25, 2014

Posted by Jill Kerby on May 25 2014 @ 09:00




It’s only one of 70 or so 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of first time buyers has hit such a brick wall of incredulity that many are now suggesting if will be quietly withdrawn.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 inept idea involves first time buyers purchasing newly built houses with just a 5% down payment and the taxpayer, via a mortgage insurance dictat by the Department of Finance, providing a balancing 20% negative equity guarantee to the lender. 

This insurance was commonplace once, bought by people who borrowed more than 75% of property asking price: 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.

Twelve years later we’re all paying the price of the absence of prudent lending policies and an entire generation of the most productive citizens are prisoners of negative equity

Given that the price of the average home in Dublin is over €399,000 or over 10 times 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, not lower down payment or an even higher than necessary monthly repayment if the MIB is capitalised over 30 years and that won’t be popular.

Messrs Kenny and Gilmore, at the launch of Construction 2020 said the mortgage insurance aims to help first time buyers get on the property ladder by lowering the bank’s lending risk and buyers’ well-founded fears of negative equity.  Unfortunately, all is really shows is that policymakers have learned nothing from the property bust and its causes – artificially cheap credit, over-lending and a disregard for its inevitable consequences.

Construction 2020 primary aim, says its detractors, is to boost construction employment by building more houses and satisfying high demand, especially in the capital. The mortgage insurance subsidy might encourage the banks to lend more easily but it will inadvertently boost the price of those new houses.

I doubt if the Taoiseach and Tanaiste really want young first-time buyers to end up as indebted as their older siblings. But they know that when property prices finally go up, this eases negative equity values for everyone, it makes the bad loans on the banks’ books look healthier and this is turn might impress ECB bank stress testers and the bond markets. 

Outwardly, at least, “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 will see this latest ‘stimulus’ proposal for what it is:  a cynical exercise in potentially driving them into a lifetime of over-indebtedness.

They need to ignore all the noise and concentrate on one thing:  is this property affordable? Can I meet ALL its costs – mortgage, maintenance, insurance, taxes – on a single or joint salary?

They also need to ask, what happens if we only have one salary or it falls? Do we have emergency saving fund in place and do we fully understand the consequences of negative equity or arrears?

If I was a first time buyer in this economy and couldn’t put down at least 20% of the property asking price, I know what I’d be doing:  I’d buy a mortgage indemnity bond. 

Just in case.

If you have a personal finance question you would like answered, please write to Jill at jill@jillkerby.ie




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