THE DEPARTMENT of Finance and the Financial Regulator’s office dismissed concerns about the introduction of 100 per cent mortgages during 2005, newly released documents show.
This led to a long but ultimately unsuccessful campaign within government to prevent the introduction of 100 per cent mortgages to the Irish market.
Records released to The Irish Timesunder the Freedom of Information Act disclose the concerns of Noel Ahern and senior officials in the housing section of the Department of the Environment to the chief executives of the banks, to his parliamentary colleagues, to the Department of Finance and to the Financial Regulator.
Former housing minister Mr Ahern is a brother of then taoiseach Bertie Ahern and a former Fianna Fáil TD for Dublin North West. During 2005, a number of banks and building societies introduced 100 per cent mortgages.
Mr Ahern wrote to the chief executives of all the banks, expressing concern at the move.
In the letter, he referred to the two most important factors underlying loans: the ability of the borrower to repay the loan and the risks with higher loan-to-value (LTV) ratios. “Moving to 100 per cent mortgage norm for first-time buyers could be viewed as involving an effective abandonment of LTV ratios or else an assumption of significant ongoing house price inflation,” he wrote.
“Any consequential instability in the housing market could have serious consequences on a wide level but especially for 100 per cent borrowers,” he said.
The banks rejected his arguments. Mr Ahern and his officials then contacted the Department of Finance and the Financial Regulator to voice their concerns.
Finance downplayed the issue. An official said that many first-time buyers were already getting 100 per cent financing from a combination of sources, including parents and credit unions. A senior Environment official countered that this group was a minority. An ESRI study showed that 80 per cent of buyers had saved an average of €23,000 over four years, he wrote in an internal memo.
Department of Environment officials stated in the memo why they believed banks were moving to higher LTV ratio loans.
“The likelihood is that the mortgage market is to some extent being driven by addiction to indefinite high growth rate increases the need for some sort of intervention to dampen things.”
Finance argued that the Government needed a strong basis to intervene in the market. Following a meeting on the issue in November, a Department of Environment official conceded that no intervention could take place.
“The conclusion of the officials of finance and the Financial Regulator is that action by the latter to try to restrain the provision of 100 per cent mortgages would not be appropriate at this stage,” wrote an environment official.
In a letter from finance regarding the same meeting, a senior official states: “The meeting concluded that it is hard to discern any wider impact of the availability of 100 per cent mortgages.
“On initial consideration it would seem the 100 per cent mortgage product is now regularising a situation where some first-time buyers previously had access to funds borrowed from a variety of sources.”
However, in the first six months of 2006, over 35 per cent of first-time buyers took out 100 per cent loans. A significant proportion of first-time buyers were also taking out higher than 90 per cent loans.
In a paper in 2009 entitled What Went Wrong, Prof Patrick Honohan, then in Trinity College Dublin, wrote: “By 2006, fully two-thirds of loans to first-time buyers had loan-to-value in excess of 90 per cent; one-third were getting 100 per cent loans. Regulatory stress tests were too timid.”
