THE BOTTOM LINE:AS THE Central Bank turns the screw on the banks to create a "shop" of new mortgage products to deal with old mortgages that will never be repaid, it is worth looking back at the explosion in lending by the old "shops".
Irish mortgages rose from €6 billion in 1990 to €148 billion in 2009, Central Bank statistics show. There were two significant bursts in lending – the annual rate of growth stood above 20 per cent from July 1997 to June 2001 and from July 2002 to June 2007.
Within the latter period, there were two significant spikes in mortgage lending – the rate of growth soared by more than 30 per cent for six months in 2004 and almost hit this level again in 2006 when the growth rate was above 29 per cent for six months of that year.
The greatest damage was done after 2005 when prices were at their highest and 100 per cent mortgages became available in the mainstream mortgage market, first from Ulster Bank and then from Permanent TSB and the other lenders who responded in an attempt to protect their share of the market.
Fuelled with support from Royal Bank of Scotland following its 2004 acquisition of First Active, Ulster Bank’s “journey to one” strategy to surpass AIB and Bank of Ireland to become Ireland’s biggest bank pushed the bank to be a much bigger mortgage player.
Permanent TSB raised concerns with the Financial Regulator about Ulster Bank’s 100 per cent mortgages in 2005, but the banking watchdog responded by saying that as a “principles-based regulator” it could not intervene and prohibit these mortgages.
Permanent TSB felt it had to respond to protect its customer base from what had traditionally been regarded as an SME lender.
Ulster Bank’s 100 per cent mortgage product in effect spelled the end of the “pipeline” of new mortgages at Permanent TSB where loans would be drawn down over a period of months. Permanent TSB offered 92 per cent mortgages, so customers threatened to cancel applications and go to Ulster Bank unless the bank responded in kind.
Irish mortgages at the now State-controlled Permanent TSB, the biggest mortgage lender during the boom, rose from €14 billion at the end of 2004 to €26 billion at the end of 2007.
Allied Irish Banks became more aggressive in the mortgage market too and even flirted with EBS, primarily a provider of home loans, about a possible takeover in 2006.
A heavy marketing spend by Bank of Scotland (Ireland) brought it a growing share of the market, while National Irish Bank attacked the existing mortgage business of the other Irish banks by offering low-cost alternative mortgages to customers who had considerably lower debt levels on their homes.
And where was the Financial Regulator to respond to this dog-eat-dog lending fight?
A tactic of “moral suasion” had no effect on the banks and the idea of applying a capital surcharge to take the heat out of high-risk property lending arose in August 2005 when the head of banking supervision at the regulator, Con Horan, floated the idea in an internal memo to his boss, Patrick Neary.
There was some push-back on the proposal within the regulator. Central Bank governor Patrick Honohan said in his 2010 report on the banking crisis that there was a delay in the proposal coming before the regulator’s board “reflecting hesitation as to its advisability”.
The view among some regulatory figures was that higher interest rates would cool the market, not regulatory intervention.
The capital surcharge on 100 per cent mortgages eventually came into force in May 2006 but it was too little too late. By this time Irish mortgages stood at €108 billion and the banks had plenty of surplus capital, given wholly inadequate international banking rules on how much they had to keep in reserve.
It is no surprise that the customers who received the biggest, most highly leveraged mortgages when property prices were at their highest should be in the greatest trouble now.
About half of the Irish mortgages listed as “impaired” by AIB at the end of last year were advanced between 2005 and 2007, the peak years of the property boom. In value terms, that rises to 58 per cent of those mortgages.
At Bank of Ireland, 45 per cent of Irish residential mortgages classified as either 90 days or more in arrears or impaired were advanced between 2005 and 2007. The figure is 67 per cent in terms of value of mortgages.
So the first customers of the new shop of products being tested by the banks over the coming months to tackle this crisis will be the last of the boom-time mortgage shops.
