JULY 2014

The Central Bank of Ireland has launched a consultation into the sale of borrowers’ mortgages to investors

HML Ireland managing director David Kelly has spoken to the Irish Independent about interest-only mortgages

Asking prices for residential properties have experienced positive growth for the first time in eight years, according to Myhome.ie

HML NewsDavid Kelly speaks to the Irish Independent about interest-only mortgages.

You can read his article here and below.

The Central Bank recently published a paper on interest-only mortgages in Ireland. It’s a timely contribution to the mortgage debate which throws a spotlight on a market sector which has evaded an awful lot of scrutiny so far but which holds real challenges for banks and customers alike. Interest-only mortgages are home loans where the borrower only pays the interest on the loan each month. Because monthly payments don’t include repayments of the amount borrowed, monthly repayments are substantially lower for as long as the interest only arrangement lasts.  During the house price boom, interest-only presented an easier route to home ownership. First-time buyers especially opted to take up the offers of an interest-only period, often for between one and three years. It was seen as a transitional arrangement which allowed new homeowners to deal with all the attendant costs of setting up a new home. At the time, the risk for either bank or borrower was considered negligible because the consensus was that house prices could only go upwards! If most interest-only products in Ireland were designed for a short period, some customers did secure long-term interest only loans. For many others, interest-only arrangements have been agreed with their banks to prevent them going into arrears since the crisis began. Unfortunately, even after the Central Bank’s paper yesterday, we don’t have great statistics on the overall level of interest-only mortgages in the Irish market and this is an issue which needs to be addressed. 

It’s instructive to look across to the UK where long-term interest-only loans are quite common. In fact as many as one in four of the UK’s 11.2 million mortgages are owner-occupied interest only mortgages, typically for the life of the loan. According to research from the UK financial regulator, the Financial Conduct Authority, nearly half the people who have interest-only mortgages may not have enough money to pay off the loan when it matures. Of most pressing concern to the FCA in the UK are the 60,000 borrowers whose loans will mature between now and 2020 and who don’t know how they will repay their loans. The fear for many of these people is that they will need to sell their homes to pay off their mortgage but they won’t have enough left over to purchase an alternative home.

What lessons are there for customers on interest only in Ireland? Clearly for anyone who took out an interest-only loan and hasn’t put a repayment strategy in place, it’s time to review their financial position and to talk to their bank. They need to understand that interest-only mortgages are not sustainable in the long run because mortgages have to be repaid. They also need to understand that the current low interest rate environment is the exception not the rule and as sure as night follows day, interest rates will turn upwards again. So, they would be well advised to take advantage of this period of low rates to make serious inroads on the principal outstanding on their mortgage. The first step from a customer perspective is to acknowledge that they need to do something. For example they could look at any savings which they might have which could be used to reduce the principal outstanding.

Continued over the page

 

HML NewsAs banks make more progress on the overall arrears issue they will move on tackle other potential problem areas including long-term interest-only customers. Perhaps the main lesson is not to wait for the crisis to develop but to take pre-emptive action. In the UK, the FCA, the Council of Mortgage Lenders and the Building Societies Association are now working together to ensure lenders contact their interest-only borrowers in order to prompt them into action.  Here in Ireland encouraging lenders and borrowers to think ahead would be a good first step.

HML CIO Kim Brien speaks exclusively to Silicon Republic about IT strategy.

You can read the article in full here, while one of the main questions and answers can be found below.

HML manages billions of euro worth of assets – does that put a greater onus on your compliance efforts, and how do you go about managing them?

We take our regulatory responsibilities very seriously. Whether you are managing €1 billion or €40 billion of assets, you still have to be compliant. Our risk management has been reviewed by rating agencies including Fitch and Standard and Poor’s (S&P) and viewed to be the best there is . “HML's risk management discipline is robust and operates in a controlled environment, in our view.” S&P servicer evaluation report, September 2013.

  

They could undertake a financial review and see how much of their current spending they could divert to making repayments on the principal outstanding. If they have tracker mortgages, they could, for example, choose to take advantage of the increased disposable income they have as a result of recent tracker rate reductions to begin making repayments on the principal.

Ideally, interest-only borrowers need to contact their lenders and examine the implications of moving to the more normal model of a capital and interest mortgage where the monthly repayments contribute to the eventual repayment of the amount borrowed as well as the interest. Inevitably, a switch like this will lead to a significant increase in monthly payments compared to an interest-only arrangement. However, if that proves too challenging, they may find their bank more willing than they might expect to consider restructuring the mortgage to enable the higher payments to be met. Such restructurings might be based on extending the term of the mortgage, deferring payment of part of the mortgage, capitalising any arrears which might be present or splitting the mortgage and repaying capital and interest on one portion while the other portion is “warehoused”. The sooner a long-term sustainable payment plan, designed with the bank’s support is put in place, the better.

Even if customers don’t take the initiative to contact their bank, it’s unlikely that the bank will let them continue on interest-only loans indefinitely if they can avoid it. The current interest of the Central Bank in this issue confirms that. Unlike the UK, in Ireland most interest-only loans are open to review at regular intervals. A sustainable mortgage solution with repayment of the capital as its goal is the key objective here.

HML Ireland Update

Date reflects what the statistic was during that period, rather than when the statistic was published

Consumer Price Index (Central Statistics Office)

JUNE ‘14

0.4%

MAY ‘14

0.4%

APRIL ‘14

0.3%

European Central Bank (ECB) Base Rate

JULY ‘14

0.15%

JUNE ‘14

0.15%

MAY ‘14

0.25%

Unemployment Rate (Central Statistics Office)

JULY ‘14

11.5%

JUNE ‘14

11.6%

MAY ‘14

11.8%

Average National House Prices (Myhome.ie)

Q2 ‘14

Up 1.3% from Q1

€190,216

Q1 ’14

Down 0.7% from Q4

€187,736

Q4 ’13

Down 0.9% from Q3

€189,086

Arrears(Central Bank of Ireland - CBI)

PDH – total

PDH – 90 days+

BTL – total

BTL – 90 days+

Q1 ’14

132,217

93,106

39,361

31,048

Q4 ’13

136,564

96,474

39,250

30,706

Q3 ’13

141,520

99,189

40,426

31,227

Home Repossessions (CBI)

PDH

BTL

Q1 ‘14

1,116

568

Q4 ‘13

1,014

503

Q3 ‘13

1,050

516

Industry StatisticsConsumer Price IndexThe CPI in June was 0.4% higher than June 2013, remaining the same on May. Notable upward pressures came from the education (4.5%), alcoholic beverages and tobacco (4.1%) and miscellaneous goods and services (3.9%) sectors.

This was partially offset by declines in communications (-4.7%) and clothing and footwear (-3.4%).

ECB Interest RateThe ECB base rate remains at 0.15%.

Mario Draghi, president of the ECB, said: “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. The latest information signals that the euro area economy continued its moderate recovery in the second quarter, with low rates of inflation and subdued monetary and credit growth.”

Unemployment RateThe unemployment rate decreased by 0.1% between June and July, standing at 11.5%. This represents 382,800 people out of work. In the same month in 2013, the unemployment rate stood at 13.0%.

House PricesThe national average house price in Ireland stood at €190,216 in Q2 2014, a 1.3% increase on the previous quarter, according to Myhome.ie’s analysis of asking prices.

This is the first positive price growth in almost eight years.

Commenting, Angela Keegan, managing director of Myhome.ie, said: "It’s heartening to see asking prices nationally rise for the first time in eight years. While this is an important landmark on the road to recovery, we are still much closer to the start of that journey then the finish.

“The average mix-adjusted asking price in Dublin is now 34% higher than the national figure. This is on a par with trends seen at the height of the boom when the difference stood at 35%, albeit prices are at a much lower base.”

ArrearsPrincipal Dwelling Houses (PDH)

The number of PDH mortgage accounts in arrears declined by 3.2% between Q4 2013 and Q1 2014. Out of the total mortgage accounts, 17.3% were in arrears, representing a total 132,217.

There was a fall of 3,361 of the number of accounts in arrears of more than 90 days, the Central Bank of Ireland said.

However, accounts in arrears of more than 720 days increased to 35,314, representing almost 68% of outstanding arrears on PDHs and balances of €7.4 billion.

Buy-to-let (BTL)

The number of BTL mortgage accounts in arrears increased during Q1 2014 to 39,361, representing 27.2% of accounts. However, there was also an increase in the number of those in arrears of more than 720 days, representing 9.2% of accounts with balances of €4.2 billion.

Home RepossessionsAt the end of Q1 2014, there were 1,116 PDHs and 568 BTLs in lenders’ possession. Of the PDHs, 281 were taken into possession during the quarter, 54 of which were the result of a court order, while 227 were abandoned or voluntarily surrendered.

Top News StoriesThe Central Bank of Ireland has launched a consultation into the sale of loan books.The objective is to ensure that consumers with mortgages that have been sold by a regulated entity to a currently unregulated entity are afforded the same regulatory protections they had before the sale.

This includes whether their new mortgage owner adheres to the Code of Conduct on Mortgage Arrears. The proposed approach is through legislation, but the Central Bank wants to ask consumers and firms within the industry whether this is the best approach.

The consultation will run until August 22nd.

Ireland’s growth is stronger than expected.This is according to the Central Bank of Ireland’s Q3 2014 bulletin, which noted that improving exports is a main driver behind the unexpected momentum.

“Further growth in employment should stimulate increases in household incomes and consumer confidence and, with what has been a lag, support modest growth in consumer spending,”

the Central Bank said.

It also commented on the banking sector, where profitability is improving and funding costs easing. However, banks still need to progress the performance of impaired loans “by placing them on a truly sustainable basis wherever possible”.

The Central Bank wants lenders to increase the pace of the conclusion of sustainable long-term arrears arrangements.

Royal Bank of Scotland (RBS) has been advised to sell a majority stake in Ulster Bank.

According to the Sunday Business Post, RBS has been formerly advised by Morgan Stanley. An announcement is expected wc 4 August and could trigger a former bidding process, the newspaper added.

RBS chief executive Ross McEwan recently said the various business opportunities were currently being assessed, and he could go into more detail “in the next two or three months”.

Deutsche Bank has purchased €400 million worth of loans from the National Asset Management Agency (NAMA).According to sources close to the deal (known as Project Spring), Deutsche Bank has bought the portfolio of loans linked to developer Gerry Conlan for an unknown price.

The Project Spring sale follows the previous announcement that NAMA made €211 million of profit in 2013, while it completed its largest ever loan sale transaction. The Portfolio Eagle deal was concluded with Cerberus Capital Management.

Top News Stories

Concerns have been raised about interest-only mortgages in Ireland.A large number of these types of loans in the country were taken out for BTL purposes between 2005 and 2008.

New figures from the Central Bank show that many of these mortgages will convert to full repayment over the next two years, while 44% of BTL interest-only borrowers will be into retirement age when their loans change to full repayment.

Despite this, the Central Bank noted that there is an average of 14 years until this segment of borrowers retire, so they have plenty of time to put strategies in place to cover the higher repayments.

The report noted: “Evidence suggests that the switch from interest only to principal-and-interest has tended to trigger arrears in the past for these borrowers, with over-90 days arrears rate much higher than for other BTL borrowers.”

There is currently a discussion in HML’s Interest-Only Mortgages group on LinkedIn about the Central Bank’s report.

AIB has returned to profitability.AIB has posted its half-year results, which show it has returned to profit for the first time since it was bailed out.

It posted pre-tax profit of €437 million to 30 June 2014, a €1.3 billion improvement in performance compared to the first half of 2013.

Since December 2013, total impaired loans have fallen by 10% (€2.9 billion), while the total number of accounts in arrears in its Irish residential mortgage portfolio fell by 6% over the first half of the year.

David Duffy, chief executive officer at AIB, commented: “The group has demonstrated its capacity to support economic recovery with loan approvals, including the UK, of c.€5.6 billion, up 33% year on year. Our mortgage arrears and overall levels of impaired loans are reducing and our performance in the first half of the year saw a material reduction in provision charges.

“As the Irish economy and the bank recovers, we remain focused on growth and maximising value for the Irish state, as 99.8% shareholder, and all other stakeholders over time.”

It has also been announced that Richard Pym, the chairman of the Co-operative Bank, will step down from his role this year to join AIB as a non-executive director and chairman-designate from October.

Ireland’s GDP will increase by 2.8% this year.This is according to Bank of Ireland’s latest outlook for the economy, which noted a 3.4% GDP growth for 2015. In addition, a robust export growth of 4% is expected for this year.

“The recovery path that we are witnessing is in keeping with what we would expect for a small open economy like Ireland. The starting point is a rebound in exports, which leads to a pick-up in investment. This supports employment growth which in turn, and in time, underpins an improvement in

consumer spending,” commented Bank of Ireland’s chief economist Loretta O’Sullivan.