State-sponsored sub-prime lending. That is what the Government announced this week and it is a disaster waiting to happen.
Eoghan Murphy, the housing minister, who is normally is an astute politician, has, I fear, erred in his attempts to remedy the housing crisis.
He announced details of his new mortgage scheme which will offer low-interest mortgages to first-time buyers who have been rejected by the banks.
If you took the €200m — the cost of the scheme to the taxpayer — and placed it on a barge and sailed that barge out into Dublin Bay and tossed the cash over the side, it would be as much use as what the Government is proposing here.
Under the terms of the so-called Rebuilding Ireland Home Loan scheme, prospective homeowners will be able to apply for a mortgage to buy either a new or secondhand home.
The Government initiative can be used for new and secondhand properties or to build your own home and will be available from February 1.
While it will be subject to the same lending criteria as ordinary banks, which currently offer first-time buyers interest rates of more than 3%, under this scheme successful applicants will incur low interest rates of closer to 2% over the lifetime of the mortgage.
Amazing, isn’t it and who would begrudge anyone a lift up?
— M Corcoran Kennedy (@MarcellaCK) January 25, 2018
The scheme will be reserved for borrowers with an annual gross income of no more than €50,000, or €75,000 for couples.
Central Bank rules will apply so borrowers will be able to take a mortgage for 90% of the property’s value.
Borrowers will be able to choose a fixed rate of 2-2.25% over 25-30 years — terms unavailable from any bank.
In real terms, this means first-time buyers will be able to get a loan worth up to €288,000 with an interest rate of 2.25% for 30 years.
It has been estimated that such a scheme and low interest rates could save homebuyers between €8,000 and €10,000 over the lifetime of a mortgage.
What is not great about that?
And remember this is a well-meaning scheme aimed at those who earn too much to qualify for other State benefits but not quite enough to buy without some assistance. The “squeezed middle” that Leo cares so much about.
But there are several major, and I mean major, problems with this thing.
Firstly, and most obviously, this is a demand side-measure at a time when the entire crisis is based upon a lack of supply.
Lots of discussion on housing affordability this week, but clear and definite progress being made on the issue. New report just published by @RebuildingIRL / @HousingPress looks at how we get more affordable housing into system. https://t.co/yVpGEYp2UA pic.twitter.com/DqVBcnXJIO— Peter McVerry Trust (@PMVTrust) January 25, 2018
It is like someone standing beside a house fire and having the State hand you a can of petrol to pour on to it.
All Murphy and the Government have done is launch a scheme which will extend loans to people currently shut out of an overcrowded market. By giving them the loans all you do is boost demand without tackling supply.
The second and more worrying aspect of this scheme from a public administration perspective is the role of the local authorities in it.
Under the scheme as announced, local authorities — who have a woeful record in collecting rents in this country — will be charged with this scheme.
Just to put it in perspective, David Hall of New Beginnings said 46% of the local authority-backed shared ownership mortgage schemes are in arrears. That is almost half.
More fundamentally, there is a real danger of an accountability deficit with this new scheme as successive Governments have resisted calls to bring local authorities in under the auspices of the Comptroller and Auditor General and the Public Accounts Committee (PAC).
They are overseen by a new entity called the National Oversight and Audit Commission which was established under the Local Government Reform Act 2014, but, in truth, it has no teeth and there is no public accountability in comparison with the C&AG and the PAC.
This is a real problem in that the lending criteria seem designed to circumvent the rules that the Central Bank has applied to commercial banks and limit the amount someone can borrow to 3.5 times their earnings.
Local authorities as unregulated financial providers are not subject to Central Bank rules.
This means local authorities are not limited to the lending limits and opens up real dangers of local politicians and administrators coming under pressure to extend more generous lending limits which can’t ever be paid back.
As a result, the risk of default under the new scheme is significant. The people who will qualify for it are precisely those who aren’t able to qualify for a loan from the mainstream banks and are, therefore, higher risk, ie subprime.
So let’s kick this on down the tracks.
What happens to those who default? Will they lose their homes? Will local authorities begin mass evictions from those who can’t pay their mortgages?
The answer is obvious.
The same local authorities who have a woeful record in collecting rents will also be slow to enforce on delinquent borrowers. The State, yes the taxpayer, will be left nursing massive losses off the back of this.
This is madness and it has to be stopped before it begins.
As mad a policy as it was to propose, it is deeply worrying that this was allowed pass through Cabinet.
The normally prudent Finance Minister Paschal Donohoe, normally would run a mile from such a hare-brained scheme.
Given he has given his all-clear, one would suspect that behind all the PR, Murphy and Government believe the numbers who end up availing from this scheme will be low and the risk is therefore low.
Yet, the PR is all important is seems and in this case it appears the drive for positive headlines has outweighed prudence and common sense.
For Murphy, the newbie housing minister, his motivation to make some positive inroads to the housing crisis are understandable.
He has faced ever-increasing homelessness numbers since taking office and several stated Government targets have been missed.
But this scheme is not the solution.
The solution would be to see local authorities starting to build houses.
Despite this crisis being dubbed an emergency in 2014 some councils did not build a single new social house.
Official figures show that in total, 21 local authorities, including Galway City Council, were recorded as having built no social housing units, while Cork City Council built just one additional unit.
In the first nine months of 2016, councils across Ireland built just 161 new social homes. That is the real scandal.
Murphy would say that total new housing solutions have ramped up but are nowhere near where supply needs to be.
Murphy too is a former member of the PAC and was a leading critic of the doomed Dublin Docklands Development Agency and its failed legacy in the capital’s inner city.
He could do well to remember the lessons from his time at PAC because there is a real fear that the committee in years to come will be pouring over the lost millions to the State from this scheme.
If this madness is allowed proceed, then it will be clear, we have learned nothing from the crash.
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