EU warns Government over mortgage insurance scheme

The European Commission has warned that the effectiveness of the new mortgage controls introduced by the Central Bank could be adversely affected if the Government introduces a mortgage insurance scheme.

In its latest surveillance report on the performance of the Irish economy since exiting the bailout programme, the European Commission welcomes the Government’s plan to introduce loan to value and loan to income limits.

The report, written before the Central Bank announced the new rules, said that the plan will lower the risk of future bank credit and housing booms.

The staff report of the Directorate-General for Economics and Financial Affairs notes the effectiveness of these regulations on mortgage lending could be affected by plans for the introduction of a mortgage insurance scheme and as a result might not address the risks of a property or credit bubble.

“Such a scheme . . . would provide a state or private guarantee on a portion of a new home loan to first-time buyers, allowing them to have a lower deposit and thus possibly bypass the Central Bank’s macro prudential measures.

“However, it remains unclear who would pay for the insurance scheme, i.e. the lender, the borrower or the State. Moreover, unless the insurer is a non-Irish entity any mortgage insurance would not address concerns over systemic domestic risk,” it states.

Conditions improved

The report is generally positive in tone and concludes that both the financial market conditions as well as the fiscal situation have improved in Ireland.

It states that there has been stronger than expected economic recovery, with two out of three banks in profit and unemployment on a downward path.

It has some criticism of what is described as “measurable overspending” by the Government in 2014 but accepts that the general government deficit will stay within the ceilings set out under the EU’s excessive deficit procedure.

It has said the extra spending without any savings to offset it will mean the “margin is narrow” for the Government to reach its 3 per cent deficit target for 2015.

“More ambitious deficit targets would have helped putting the still very high debt-to-GDP ratio firmly on a downward curve.”

In the banking sector, it notes that SME credit demand remains weak.

Turning to structural reform of national government, it concludes there has been “uneven” progress but acknowledges that when the Job Path strategy becomes fully operational it will be an important tool for labour activation.

While its assessment is that the 2015 Budget will stay within the limits set under the EU’s Stability and Growth Pact, it is less certain about future budgetary policy.

“It remains to be seen how recent Government announcements on further tax cuts and expenditure increases in the 2016 Budget will be squared with the provisions of the Stability and Growth Pact.

It also criticises the non-binding nature of departmental expenditure ceilings. It concludes the the Haddington Road aims of achieving savings from longer and more flexible working hours have “fallen short of plans in terms of agency cost reductions.”