Insurance scheme could significantly cut mortgage costs, committee hears

Industry experts say cuts of up to 2% in mortgage rates could be delivered

The Central Bank is thought to be considering a compulsory scheme which would see third parties insure 5-10 per cent of a mortgage Photograpgh: Matt Kavanagh/The Irish Times

The Central Bank is thought to be considering a compulsory scheme which would see third parties insure 5-10 per cent of a mortgage Photograpgh: Matt Kavanagh/The Irish Times

 

The adoption of a compulsory mortgage insurance scheme in Ireland could significantly cut the cost of home loans for first-time buyers and shield banks from excessive risk associated with property lending, an Oireachtas committee has heard.

Insurance experts said cuts of up to 2 per cent in mortgage rates could be delivered, saving first-time buyers up to €2,500 a year, if a universal scheme was rolled out here provided, of course, lenders passed on the capital savings to borrowers.

Representatives from the industry appeared before the Joint Committee on Finance, Public Expenditure and Reform to discuss the potential introduction of a mortgage insurance scheme in Ireland.

The Central Bank has signalled it may soften new mortgage lending restrictions, which will require borrowers to have a minimum 20 per cent deposit, by introducing a mortgage insurance scheme to cover part of the deposit.

Mortgage insurance, which is widely used in other countries and is compulsory in Canada, allows mortgage providers to protect themselves for potential losses suffered as a result of a borrower defaulting by insuring part of the loan.

It is understood the Central Bank is considering a compulsory scheme which would see third parties insure 5-10 per cent of the loan.

However, it is unclear who will bear the cost of the insurance at this stage, the lender or the borrower; or if the State intends to underwrite it.

Too crude

Joe Leddin of international insurance broker JLT said the restrictions proposed by the Central Bank to curb excessive lending were “too crude an instrument” and would only serve to exacerbate the problems already evident in the Irish market.

“There is an alternative. Rather than reducing risk by restricting access to the market for first-time buyers, you can choose to insure against the risk.”

“The remedy, as we see it, is to introduce a mortgage indemnity guarantee scheme (migs) which protects the banks against the risk of loss in the event of a fall in house prices.”

“The question is who should carry the cost of that insurance.”

Mr Leddin said his organisation advocated a scheme in which the banks would pay a once-off premium to insure against a fall in house prices of up to 30 per cent, which would have no additional cost to the State.

Pool of companies

He said the insurance should be provided by a pool of companies with a minimum A-credit rating, to reduce the risk even further.

Aside from providing greater risk cover to Irish banks and doing way with the need for first-time buyers to come up with 20 per cent deposits, such a scheme would endow the Central Bank with a valuable regulatory tool.

“By setting the level of Migs in the market, the Central Bank can effectively ease or restrict access to the housing market. Think of Migs being the Central Bank’s thermostat.”

If 100 per cent of the savings were passed on directly to borrowers, “we believe the average mortgage rate in the Irish market could fall by up to 2 per cent,” he said, a measure which could save first-time borrowers up to €2,500 a year.

Angel Mas, president and chief executive of Mortgage Insurance Europe at Genworth, said mortgage insurance was a “well-trusted financial instrument used in a number of international jurisdictions, facilitating prudent lending.”

He said the insurance was once prevalent in Ireland but was largely dispensed with as lenders chased new lending in the property boom, and in the absence of any regulatory compulsion.

Mr Mas said if mortgage insurance had been used extensively in Ireland it could have saved about €1.7 billion of bank losses associated with the collapse in property values.

He said mortgage insurers were not just there to pay out when a borrower ran into trouble but would work with lenders to restructure loans in default and to keep borrowers in their homes.

He said his company, which controls a number of policies in Ireland, had worked with lenders here to keep 15,000 families in their homes ahead of foreclosure and has paid out over €70 million to date to facilitate this.