The decision by the Governor of the Central Bank, Mr Maurice O'Connell, to write to the chairmen of the banks and building societies expressing concern about "disturbing practices" in mortgage lending should ring alarm bells for potential home owners and for the wider community. Mr O'Connell took the unprecedented step of issuing what amounted to a public warning not as a guardian of consumer interests but as "prudential supervisor" of the institutions themselves. In other words, the lending situation has become so unbalanced and out of line with agreed guidelines that it could threaten the stability of the financial system.
This may seem an alarmist view, but the Central Bank is an ultra-cautious institution and does not engage in public controversy for the sake of it. For about two years now, as the price of housing has soared, it has regularly expressed concern over the phenomenon and expressed the pious wish that the financial institutions should not contribute to an over-heating market through excessive lending. Nothing happened. It was blithely ignored by the various institutions as they competed aggressively for customers and a larger share of the market. Last month, the Central Bank directed three of the main financial institutions to tighten up their lending policies.
The only conclusion that can be drawn from the latest warning to the chairmen of the various institutions is that the strictures of the Central Bank were again ignored. Why else would Mr O'Connell ask that his representations be brought to the attention of the various boards and seek a formal response from them ? He also asked that the Central Bank be kept informed at all times of changes of significance in the criteria for mortgage finance.
In his letter, Mr O'Connell spoke of evidence that lenders were including additional income, from sources such as room rental, parental guarantees or potential future earnings when assessing an application. A particularly disturbing feature, he said, had been the use of excessively high thresholds of disposable income as criteria for loan approvals. In that context, he reminded them of the requirement to consider the financial and economic outlook - and the certainty of a downturn in due course - both in their own interests and in the interests of borrowers.
In the mid-1970s, the banks and a number of lending institutions engaged in a similarly greedy, and ultimately destructive lending policy. They encouraged farmers to compete with one another for available land at unsustainable prices. When interest rates rose, the result was bad for the banks, disastrous for many progressive farmers and has left scars that have yet to heal. If financial executives are prepared to jettison their social obligations because of competitive pressures and demands for higher profits, their boards should rein them in the public interest. The recent failure of the institutions to pass on cuts in EU interest rates to their customers shows clearly where their priorities lie.