Banks shut doors to new homes
29 August 2010 By Kathleen Barrington John - not his real name - is a 31-yearold chartered acc o u n t a n t wh o trained with a Big Four accountancy firm. He has just returned from two years in Australia and is working as finance director of a multinational firm in Dublin.
His fianceé is also a chartered accountant who trained with a Big Four accountancy firm. She too is just back from Australia and is financial controller with a multinational firm.
John says he and his fianceé have a combined s alary of €170,000 a year, giving them after-tax income of €9,000 a month. They recently sought to raise a €290,000 mortgage on a house that was professionally valued at €460,000, a loan-to-value ratio of 63 per cent.
The monthly repayment on the 35-year mortgage is €885 a month after mortgage interest relief for first-time buyers is factored in.
John says he has a personal loan of €30,000,while his fianceé does not have any loans at all.
He says he has an unblemished credit history. He admits his account was overdrawn occasionally as he had to make several visits home to Ireland to visit his mother who was sick.
His fianceés account generally had a surplus of about €6,000 a month.
John says his parents had always banked with AIB, so he and his fiancée applied to AIB for a mortgage. He says AIB last week refused him the mortgage unless he repaid the €30,000 personal loan. John considered the request ‘‘an absolute farce’’ so he and his fiancée applied to Bank of Ireland for a mortgage.
The Bank of Ireland told them that they would have to prove that they had regular savings in order to raise a loan. ‘‘As of August 25, I would have a current account balance of €5,100 and she will have €5,500,” said John.
He considered the request by Bank of Ireland that he show a savings history to be an effective ‘no’ to his mortgage request and has since gone to a broker who advised him that he may be able to obtain a mortgage elsewhere, possibly from Permanent/TSB, Haven or KBC.
John says an Australian bank was prepared to lend him and his fianceé far more than he wants to borrow from the Irish banks, even though he had only lived in Australia for a short time.
When I suggest the lack of credit indicates house prices have further to fall and that he might get a better deal on a house if he waited a bit longer, he explained that he wanted to buy the property, an investment property owned by his father on which there is no mortgage. His father would, in effect, be giving him the equity in the home.
The only thing stopping John from giving his real name is that he does not wish to upset his multinational employer. But speaking in the spanking new offices of the well-known company, the message from this young finance director is clear: despite their repeated assertions to the contrary, AIB and Bank of Ireland are not open for business.
John is clearly angry with the bankers, saying he told them: ‘‘You would be better off telling me you have no money than insulting me.”
John is not alone. The new mortgage lending statistics published by the Irish Banking Federation last week painted a grim picture.
They showed that new mortgage lending was down 40 per cent in the second quarter of the year compared with the comparable period last year.
The figures show that AIB, Bank of Ireland, Bank of Scotland, EBS, Haven Mortgages, ICS Building Society, KBC, Irish Nationwide, Permanent TSB and Ulster Bank together lent just €1.3 billion to 7,827 borrowers in the second quarter of this year compared with €2.1 billion to 12,686 borrowers for the comparable quarter in 2009.
In the second quarter of 2006, when the Celtic tiger was in full swing, the banks lent €10.1 billion to 53,449 borrowers.
In short, new mortgage lending is down 87 per cent from the levels reached in the first quarter of 2006.Given that house prices are dictated to a great degree by the availability of credit, the figures suggest house prices may have a lot further to fall.
If house prices were dictated exclusively by the availability of credit, the figures suggest that a house worth €1 million in 2006 could be worth as little as €130,000 today, though clearly it would be hard to find willing sellers at such price levels.
But the new mortgage lending figures also augur poorly for liquidity in the economy as a whole if older people like John’s father are unable to realise any value from their assets due to the inability or unwillingness of the banks to lend to good people like John who want to buy them.
Former banker and financial analyst Peter Mathews knows John personally and is shocked that the banks would refuse a ‘‘no brainer’’ loan application from him and his fiancée. He reckons that John’s experience is replicated all across the country as ‘zombie’ banks are unable to lend.
Despite the billions that have been injected by the taxpayer, he believes AIB and Bank of Ireland remain inadequately capitalised and are consequently unable to lend to get the economy moving again, though others suggest the banks may also be unwilling to lend as they get a risk-free return by depositing their money instead of taking the risk of lending even to strong borrowers such as John.
Mathews has been campaigning for the adequate recapitalisation and nationalisation of AIB, Bank of Ireland and EBS using a combination of taxpayers’ money and a €6.5 billion contribution from the bank’s bondholders in the form of debt forgiveness.
Mathews believes this would allow the banks to begin lending again, that the banks would ultimately become profitable lending to people such as John and that taxpayers would get a return on their investment in a few years’ time when the banks would be sold off to the private sector.
John agrees: ‘‘Nationalisation is the way to go.”
One thing seems certain: if the government doesn’t move quickly to address the paralysis in the credit markets, it is likely that a foreign bank or a new player will target low-risk borrowers leaving the Irish banks in which the taxpayer has already invested with all the bad risks and no prospects of recovery at all.
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