The Irish Mortgage Market - 2018 and beyond.
Introduction
Good morning. I would like to thank the Institute of Bankers for arranging today's event1.
The housing and mortgage market in Ireland continues to attract significant public attention. The
challenges in the housing market are a cause of real concern for many citizens.
The interplay between the availability of suitable housing, house prices and the mortgage market are
critical dynamics in the economy and society as a whole. Furthermore, as we continue to deal with
the toxic legacies of the financial crisis, both conduct and prudential related, it is clear that elements
of dysfunction remain in both the housing market and the mortgage market.
In my remarks today, I will cover:
 the key characteristics of a functioning mortgage market;
 the Irish housing market;
 the Irish mortgage market today;
 macro prudential measures; and
 mortgage interest rates and switching.
I will start by providing an overview of the role of the Central Bank in the context of the mortgage
market.
Role of the Central Bank
The mission of the Central Bank is serve the public interest by safeguarding financial and price
stability and protecting consumers. My aspiration for the financial services system is that is
wellmanaged, resilient and serves the needs of the economy and its customers over the long term.
This requires that financial services firms:

have sufficient financial resources, including under a plausible but severe stress;

have profitable business models over the long-term;
 are well governed, have effective cultures, with effective risk management and control
arrangements; and
 can recover if they get into difficulty, and if they cannot, are resolvable in an orderly manner
without significant externalities or taxpayer costs.
One key role of the financial services system is to provide borrowers with loans to purchase their
homes. The Central bank's role is to ensure, through its economic analysis, its macro prudential
tools, its micro prudential supervision (as part of the SSM2), and through delivery of its consumer
protection mandate, that the economic and social good of mortgage provision (as a critical financial
service) is prudent, sustainable, and that the best interests of consumers' are protected. In other
words, we strive to ensure that lenders are appropriately mitigating the risks inherent in mortgage
lending.
Unfortunately, there are few countries that have a worse experience than Ireland of the economic
and human costs that arise when these risks crystallise. This is why the Central Bank and other
agencies have taken such interventionist action in the mortgage market since the onset of the
financial crisis. Before considering these issues and risks further, it is worth spending a moment on
the key traits of a functioning mortgage market.
A simple functioning mortgage market
In Ireland, the vast majority of mortgage lending takes place through the banking system. As well as
pooling risk (collecting savings from depositors and lending to borrowers), banks also undertake
maturity transformation - obtaining relatively short term funding and lending over the long term.
Banks charge margins above the cost of funding to cover, inter alia, operational costs, credit risk
costs and to give a sufficient return after these costs to generate a sustainable profit over the long
term.
For the market to function well, consumers should be treated fairly and there should be appropriate
frameworks in place, such that contractual terms are clear to support their decision-making, and
strong protections exist to support them if they get into payment difficulties. In order to
differentiate between secured and unsecured lending in the pricing of loans, it is important that
lenders have the ability, as a last resort, to realise the underlying security if the borrower defaults on
the loan.
A functioning market should deliver a sufficient supply of appropriately priced mortgages to support
house prices that are in line with the fundamentals of the economy, without driving credit fuelled
house price bubbles.
It is evident that the Irish mortgage market has many of these aspects. Indeed, there has been a
significant strengthening across all these areas in the last decade or so. However, it is also clear that
dysfunction still exists - and continues to affect the functioning of the mortgage market in Ireland
today. I will turn to these shortly, but before I do, it is worth considering briefly, by way of context,
the Irish housing market more broadly.
The Irish Housing Market.
Housing market developments are central to understanding both conditions in the mortgage market
today and their evolution tomorrow. The housing stock in Ireland was just over two million homes
in 20163. This has flat lined since the height of the financial crisis - increasing by just 8,800 since 2011
(less than a half of one per cent of the stock). Over the same period, the Irish population grew by
over 170,000 (by 3.8%) to 4.7m. Added to this, with the welcome economic recovery, Ireland is
experiencing:

increasing income;

increasing employment;

a longer term trend in a reduction in the size of households4;

the increasing presence of foreign private equity firms and real estate investment trusts
(REITs), which tend to operate mainly in urban markets; and
 evidence of a trend to increasing use of short term lets in urban areas5.
In other words, and in line with classical economic theory, the demand for housing has been
increasing, at the same time as supply has, until very recently, been flat. Consequently, the strong
recovery in house prices and upward pressure on rents are understandable looking at it purely in
economic terms. However, while understandable, this does not make it easier for those that are
trying to secure housing across the wide spectrum of demand for it.
This clearly has consequences from an affordability perspective, particularly for first time buyers.
The relationship between incomes and house prices mean that unless incomes rise or there is a
decrease in house prices or there is further access to more affordable housing, the ability to
purchase a home supported by mortgage finance will be increasingly difficult for more of the Irish
population. The solution to this issue cannot be imprudent lending. The substantive solution to this
societal issue is to build more and affordable housing for Irish people.
If we look to the future, the population is expected to grow. Project Ireland 2040 estimates that by
2040 the population of Ireland will reach almost six million. This will result in a need for 550,000
more homes with current estimated housing demand of 30,000-35,000 per annum to overcome the
current shortfall and then this will reduce to 25,000 new homes per year. In this context, Central
Bank research points to house completions of approximately 23,500 units in 2018 and 28,500 in
20196.
The profile of the housing stock is also changing with an increase in the number of apartments.
Recent CSO data shows that within the Dublin City local authority area, apartments (74,537) were
the main dwelling type for the first time - replacing terraced houses (74,446)7. However, the
proportion of apartment living in Ireland is the lowest in the European Union and the number living
in semi-detached or detached housing in Ireland is the highest across the European Union8.
These dynamics require funding to be available for building and for purchase. It is unlikely and
strongly undesirable, that this funding would all come through the banking system, as was largely
the case leading up to 2008. The presence, therefore, of non-bank financial institutions such as
private equity, pension funds and insurance undertakings, in Ireland should be welcomed -
providing as it does funding for development, and reducing the risks to the domestic financial
system in the event that there is a downturn or a correction.
The Irish Mortgage Market today
The stock of existing mortgage loans at the end of December 2017 was €120.5 billion9. This is made
up of Private Dwelling Home (PDH) loans of €98.5 billion and Buy to Let (BTL) lending of €21.9 billion;
and is comprised of c.852,000 mortgage accounts (c.730,000 PDH and c.122,000 BTL)10.
In 2017, there was €7.4bn of new lending for 35,400 loans11. This was a 30% increase in the total
lending from 2016 to 2017. The average loan size for first time buyers was €206,216 and €232,275
for second and subsequent buyers. Of the mortgages in scope of the Macro prudential mortgage
measures, 54% relate to first time buyers and 46% to second and subsequent buyers.
Mortgage lending is important for the economy. It is critically important to the domestically focused
retail banks. At the end of 2017, residential mortgages represented 58% of banks' total gross
loans12. In 2017, new mortgage lending amounted to 38% of all new lending activities by the five
retail banks, including lending outside of Ireland.
Recent Central Bank research has indicated that near term developments in the volume of new
mortgage lending warrants careful monitoring such that high levels of activity are not accompanied
by the emergence of excessive cyclical systemic risk13. The macro prudential rules (which I will touch
on later) and the micro prudential regulation and supervision of the retail banks are, therefore,
critical to the continued safety and soundness of the domestic banking system.
It is one of the paradoxes of the Irish mortgage market that there are potential increases of cyclical
risks, at the same time as we have the continued human suffering and financial stability risks of
elevated non-performing mortgage loans.
At the end of December 2017, c.48,000 PDH loans (7%) and c.18,000 BTL loans (15%) were more
than three months in arrears on their repayments. Within these figures, c.29,000 PDH (4%) and
c.13,000 BTL (11%) loans are greater than two years past due. 10 years since the first waves of the
financial crisis started buffeting Ireland, and five years since the peak of non-performing loans in
Ireland, at a time when we are almost certainly closer to the next downturn than we are to the start
of the last one, we still have a crisis in the mortgage market.
First and foremost this matters because behind each account in arrears there is distress and, in the
case of PDH loans, the vulnerability of borrowers at risk of losing their home. This is why there are a
significant number of protections and supports for consumers facing mortgage arrears.
Within the remit of the Central Bank's responsibilities, the approach to mortgage arrears resolution
is focused on ensuring the fair treatment of borrowers through a strong consumer protection
framework while ensuring banks are sufficiently capitalised, hold appropriately conservative
provisions, and have appropriate arrears resolution strategies and operations in place.
This includes, regulatory requirements such as the Code of Conduct on Mortgage Arrears (CCMA),
which was put in place to ensure the fair and transparent treatment of financially-distressed
borrowers and governs how lenders interact with these borrowers. The CCMA includes
requirements that arrangements be sustainable and based on a full assessment of the individual
circumstances of the borrower and that repossession be used only as a last resort. Firms must also
follow the Mortgage Arrears Resolution Process (MARP) when dealing with borrowers facing arrears.
The MARP process also requires alternative options if a restructure could not be agreed or was not
appropriate.
Within the broader Irish consumer protection framework, there is a range of advice and support for
those in arrears, including the Money Advice and Budgeting Service (MABS), the national mortgage
Arrears Resolution Service (Abhaile) and a Court Mentor service to assist debtors faced with court
proceedings.
The Government also introduced the Personal Insolvency Act 2012, which introduced three debt
resolution processes: A Debt Relief Notice, A Debt Settlement Arrangement and a Personal
Insolvency Arrangement. The Insolvency Service was established in March 2013 as an independent
statutory body. The Government also introduced a national mortgage-to-rent scheme. There are
also a number of other non-statutory organisations providing assistance to those in mortgage
arrears.
However, these protections, safety nets and restructuring options are not going to address the
underlying problems if distressed borrowers do not engage with their lenders or the supports that
are in place. In this context, it is noteworthy that:
 circa 44% of PDH loans that are more than two years past due are also more than five years
past due14;
 38% of borrowers of PDH loans that are more than two years past due had not engaged with
their lender as of end 201715.
There is clearly a high level of personal distress in individual borrower circumstances that are
reflected in these numbers. However, particularly where borrowers are not engaging, and the hole is
simply getting bigger, a functioning secured lending market has to have meaning to that
security. There are costs to all other borrowers through the impact on secured lending pricing
together with financial stability risks where this security is undermined.
In other words, the high level of non-performing mortgage loans continues to affect the functioning
of the Irish mortgage market today. Key determinants of mortgage pricing include the risk of default
and the associated capital that a bank is required to hold to cover this risk. It is a statement of the
obvious, but this is why unsecured lending rates are higher than secured. Not only do current
default levels matter, but so do historical levels. This is reflected in the Irish banks holding
considerably more capital for mortgage lending than some European peers16. It is also why the
higher interest rates and net interest margins in the Eurozone are typically, albeit not exclusively,
found in the countries with higher levels of NPLs.
There is also a correlation between these same countries and the shrinkage in their banking sector,
and so a reduction in competition in the sector, as has been the case in Ireland. The exit of providers
and the impact on the attractiveness of the Irish market for new providers is also attributable to the
level of non-performing loans. Both of these factors also have obvious implications for mortgage
pricing.
From economic and financial stability perspectives, high levels of non-performing loans tie up capital
and operational capability, which may otherwise be used in more productive ways. Furthermore,
the uncertainty of banks' balance sheet strength and the subsequent reduction in market confidence
make them more vulnerable to funding shocks.
A comprehensive account of the history of non-performing loans in Ireland and the policy responses
to them is outlined in the Central Bank's paper on Resolving Non-Performing Loans in Ireland:
2010201817.
Banks' provisioning models, which determine the amounts they set aside for loan losses, include
assumptions about house price movements. In Ireland, the significant recovery in house prices has
led to some reduction in the level of provision coverage of non-performing mortgage loans. The
continued high level of non-performing loans makes them highly vulnerable to future economic
downturns, from both the existing non-performing loans, and potentially new defaults. While all the
Irish retail banks are significantly better capitalised than pre 2008, they are more vulnerable than
those without this legacy to future economic shocks.
While recognising that eaten bread is soon forgotten, it is worth spending some time outlining what
has been done. The hard work and sacrifices of those borrowers in distress that have engaged, the
pressure and the requirements of the Central Bank, the banks' willingness to sustainably restructure
mortgages (enforced by the Central Bank's requirements that legal action can only be done as a last
resort18), all underpinned by economic growth, have resulted in the number of mortgage accounts in
arrears being halved, primarily19 through restructure, since the peak of 2013.
At the end of 2017, approximately one in six (c.118,000) of all PDH loans in existence had had some
form of restructure. 87% of these loans were meeting the terms of this restructure, and 79% of them
are no longer in arrears20. Repayment probabilities of modified mortgages increase where
permanent or longer-term, more sustainable modifications (i.e. in line with the Central Bank's
sustainability guidelines21) are put in place, rather than modifications of a temporary nature. Other
factors more generally associated with mortgage payment difficulty such as higher loan to value
ratios, higher interest rates, loan origination cohort effects, geographic factors and interest rate type
effects are all shown to have explanatory roles when focussing specifically on the repayment
probabilities of modified mortgages.22
Unfortunately, there has also been loss of ownership. If we, economically and societally, want a
functioning mortgage market, where secured lending is priced in a different way to unsecured, then
that security must mean something. Between September 2009 and December 2017, 8,506 PDH
properties were repossessed. This equates to around one in 16 of those that were in arrears at the
2013 peak, or 7% of the restructured accounts, providing evidence that this action has been taken as
a last resort as required under the CCMA. Approximately two thirds of these were surrendered or
voluntarily sold, with the remainder repossessed through the courts. The majority of those in the
legal process now have been deemed non-cooperating before the legal process was initiated. 87%
are in arrears over 720 days with an average arrears balance of over €53,00023.
Recognising the individual distress these numbers represent, I would again urge anyone in arrears to
engage with their lenders and / or the supports that are available.
The Central Bank, as part of the SSM, continues to require banks to reduce non-performing loans in
a sustainable way. There are multiple tools available, including: re-engaging with borrowers,
restructures, accounting write downs, mortgage to rent, engaging through the Insolvency Service,
sales and securitisations and the legal process.
It is in this context that the Irish retail banks have submitted updated NPL reduction strategies.
These strategies include both planned workout and potential sales24. In the three years to
December 2017, about one quarter of the €45bn of NPL reduction in the Irish retail banks was
achieved through portfolio sales. The remainder was due to on-going restructuring, workouts and
write-offs. Similar proportions could be expected for the next three years. Portfolio sales are a
legitimate and necessary approach for banks to use to address non-performing mortgage loans.
Sales have proved to be controversial, particularly for PDH loans, in part due to a perception that the
non-banks will seek to foreclose more aggressively than banks. To date, this has not been the case.
There has been no material difference in the number of legal proceedings issued between banks and
non-banks, as a percentage of the total number of PDH accounts in arrears25.
It is also important to emphasise that the Central Bank has, with the support of the Oireachtas,
ensured that the protections of our Codes of Conduct, including the CCMA, travel with the loans - it
is the activity of credit servicing that is regulated, not the ownership of credit. A credit servicing firm
cannot take an action on behalf of or on the instruction of an unregulated loan owner, which would
be a prescribed contravention of the Code or the CCMA.
This approach already being taken in Ireland is consistent with the approach being developed across
Europe26. The European Commission has identified the presence of well-developed secondary
markets for NPLs as one of the building blocks of Capital Markets Union (CMU), which is focused on
providing new sources of financing for EU businesses, SMEs and high-growth innovative
companies in particular, reflecting both the continued importance of banks' financing of the
European economy and the associated need to resolve NPLs. The proposal creates a common
set of rules that third party credit servicers need to abide by in order to operate within the
Union. The proposal sets common standards to ensure their proper conduct and supervision
across the Union. It is focused on the activity, rather than regulating the ownership.
More problematically, it is evident that the restructures undertaken by the non-banks have typically
been more limited or have simply continued with shorter term forbearance, with a much greater
reliance on arrears capitalisations and temporarily reduced payments. There are also concerns
regarding the potential sale of loans where the borrowers have engaged, agreed and are meeting
the terms of a long term restructure (such as a split mortgage) and are in many ways locked in to the
arrangements with their lender - i.e. cannot re-mortgage.
To this end, the Central Bank has committed to complete a review of the CCMA, focused primarily
on its effectiveness as regards the sale of loans, which were not a significant feature of the market at
the time of the last CCMA review.
The protections of the CCMA only apply to buy-to-let mortgages if the residential property is the
only residential property in the State owned by the borrower. For mortgages in arrears that do not
fall within the scope of the CCMA (e.g., buy-to-let properties which are not the only residential
property in the State owned by the borrower), the provisions of the Code apply where the borrower
is a 'personal consumer'. With respect to arrears resolution, the Code requires a lender to seek to
agree an approach that will assist the personal consumer in resolving the arrears. Where the
borrower is a micro, small or medium sized enterprise, the SME Regulations apply, which include
specific requirements that regulated firms must comply with as regards handling arrears and
financial difficulties. There is significant progress in restructuring buy to let mortgages with over
22,000 restructures, and a 44% reduction in the level of BTL arrears since the September 2013 peak.
Of these, 78% are performing in line with their restructure agreements. However, there remains
over 22,000 buy to let mortgages in arrears that are not restructured or performing in line with their
restructure agreement. Of these over 13,000 buy to let mortgages have accumulated more than 720
days of arrears. While there are many complex cases behind these figures, it is important to
recognise that investors were purchasing properties to gain an investment return.
It is also important to note, that the Central Bank's codes of conduct cannot offer further protections
for those borrowers who are not engaging and are getting deeper into arrears. As conduct
regulator, the Central Bank does not have the power in regulating the conduct of business of
regulated financial service providers to interfere with the strategy and commercial decisions or the
legitimate contractual rights of lenders. If lenders could not rely on their contractual rights or make
their own commercial decisions within a consumer protection framework, it is likely to impact on the
provision of and the cost of providing credit in the market. Rather, in regulating lenders' conduct of
business, the Central Bank seeks to ensure that lenders comply with relevant conduct of business
rules, including, through providing consumers with all relevant information, putting in place a
process for the management of customers' financial difficulties and not exerting undue pressure or
influences on customers.
Macro-prudential mortgage measures
As I have touched on already, the Central Bank has taken numerous measures to both address the
mortgage arrears crisis in Ireland as well as mitigate the risk of recurrence. These include significant
enhancements in our micro prudential supervision, which includes intensive and intrusive
supervision of, inter alia, the sustainability of business models, funding risks, governance and risk
appetite, capital and credit underwriting, all of which are relevant to the provision of mortgages.
These actions also provide enhanced protections for borrowers, as do the enhancements to
consumer protection codes and the CCMA.
Furthermore, the Central Bank of Ireland's macroprudential mortgage measures were introduced on
9 February 2015. The measures aim to increase both bank and borrower resilience and mitigate the
risks of credit-house price spirals emerging, by limiting the Loan to Value (LTV) and Loan to Income
(LTI) ratios applying to new residential mortgage lending27. The macroprudential mortgage measures
form an integral part of the Central Bank of Ireland's macroprudential policy framework.
The Central Bank can also strengthen the resilience of the banking system by using the
countercyclical capital buffer. The countercyclical capital buffer (CCyB) is a time varying capital
requirement. It is designed to make the banking system more resilient and less pro-cyclical by
requiring firms to hold more capital at the appropriate time so they are prepared for a downturn.
The CCyB is currently set at 0%.
Deputy Governor Sharon Donnery recently spoke in relation to the CCYB28. The speech considered
Ireland's intrinsic volatility and the scale of legacy debts which increases vulnerability to future
cyclical reversals, the likely minimal impact on credit growth and economic activity, the
measurement and outlook uncertainty alongside data and implementation lags, how to enhance the
effectiveness of already active macroprudential instruments and the role of new accounting
standards.
The speech concluded that the arguments in favour of setting a positive CCyB sufficiently early in the
cycle, to build in resilience and mitigate pro-cyclicality in a downturn, are compelling.
Interest rates
A common and justifiable complaint about the Irish mortgage market is the interest rates charged
relative to the eurozone average interest rate. While averages can be misleading, as is the case in
Ireland if tracker rates are included, it is undoubtedly the case that mortgage interest rates for new
lending are higher in Ireland than the average for other eurozone countries. There are multiple
reasons for this and to illustrate them, it is worth comparing the Irish market with another with
significantly lower rates, such as France. This can be done through a number of lenses:
1) Credit risk:
The historical and current level of defaults in the Irish system are materially higher than
most other Eurozone countries, including France, which has an NPL ratio of 3%29.
Uncertainty regarding effecting collateral, and the use of guarantees in France (for 58% of
loans30), which customers pay for and which protect the banks in the event of the borrower
defaulting are also relevant factors.
2) Fixed vs variable interest rates:
In parts of continental Europe, mortgages are offered at long dated (15-20 years) fixed rates.
In France, as at the end of 2016, fixed rate loans accounted for 97.9% of new lending and
90.7% of outstanding loans31. In Ireland, 81% of loans are on floating rates and the
remainder mostly on short dated fixed rates (three years or less)32. Currently there are two
banks that offer 10 year fixed rate mortgages and no banks have a term that exceeds 10
years33. This characteristic translates interest rate risk from the banks, who can typically
hedge it, to the borrower, who typically cannot, so increasing the vulnerability of Irish
borrowers to interest rate shocks and the credit risk associated with the loan.
3) Size, depth and concentration of the market:
In France, outstanding housing loans were €955 billion at the end of 2017, about eight times
the size of the Irish mortgage market. There are obvious economies of scale for firms in
materially larger markets, which may enable them to spread their costs over a larger
customer base.
Perhaps more importantly, the level of competition is greater. In Ireland there is currently a
limited number of lenders operating in the market and the largest lenders have a significant
market share. Central Bank research shows significant concentration in the Irish market34,
with each of the main lenders also still facing some degree of legacy weaknesses and
therefore costs.
The low level of new entrants into the Irish market, given the relatively low barriers to entry
for other European banks, which do not require further authorisation to offer mortgages in
Ireland, is noteworthy and is plausibly connected with the levels of NPLs remaining in the
system, as well as the relatively small size of the market.
4) Switching
The lower levels of competition in the Irish market combined with lower levels of switching
reduces the level of market discipline being applied, allowing higher margins to be charged.
Some lenders take advantage of this inertia to differentiate between new lending and old
and charge higher margins on the older lending, which are unlikely to be justified by the
factors I have described.
Central Bank research35 shows that circa 8% of new loans arose from switching between
providers. This is significantly less than in many other European markets (including France
and the UK). While there are 41% of accounts that are on tracker mortgage interest rates
and are unlikely to be able to make savings, a sizeable majority of other borrowers could,
either by switching products with their existing provider or by switching provider.
The Central Bank conducted research on switching in Ireland in 201736. The research showed
that many consumers in Ireland have not considered switching their mortgage unless they
are moving home and that many are concerned that the process is too difficult and complex
- notwithstanding that they have been through the process at least once before in taking
out their mortgage in the first place. One of the key findings from the CCPC research in 2016
was that "Only about one in seven mortgage holders have thought about switching or
actively engaged with their mortgage provider in the past five years. Just 2% have actually
switched their mortgage in the past five years"37 In 2017, of the total count of new loans
circa 8% were switchers (2,853 of 35,472).
For a first time buyer taking out the average size of a new loan (€206,216) with a 20%
deposit for a 30 year term, the current rates on offer vary from 2.60% to 4.2%38. The
potential amount saved between the low rate of 2.6% and the highest rate of 4.2% is
significant. The monthly difference is €183, the yearly difference is almost €2,200 the
difference over 5 years is almost €11,000. While this is may be an extreme example, even
smaller differences in interest rates matter, offering the potential for significantly reduced
monthly payments and / or reduced mortgage terms.
In August 2017, the Central Bank published a Consultation Paper on, Enhanced Mortgage
Measures: Transparency and Switching39, which set out a series of proposed new mortgage
switching and transparency measures. Submissions received during the public consultation
process are currently being analysed with the intention to issue amendments to the
Consumer Protection Code 2012 in the near future.
The aim of the proposed new measures will be to help consumers make savings on their
mortgage repayments, to support consumers considering switching their mortgage and to
ensure that such activity takes place within a transparent framework that protects the best
interests of consumers. When implemented, these measures will build on the strong
framework of protections already in place for mortgage borrowers, including the enhanced
transparency measures introduced for variable rate mortgage holders in 201640.
Future developments
As well as looking to the past, and at the present, it is important that we look to the future. The
projected levels of growth in the Irish mortgage market, high net interest margins, regulatory
developments, financial innovation and the continued reduction in non-performing loans are likely
to lead to increased competition in the market.
Completion of Banking Union41 will hopefully increase the level of cross border activity within the
Eurozone. Similarly, Capital Markets Union42 should increase the fungibility of capital and liquidity
across borders and so enhance cross border competition.
Non bank mortgage lending is also likely to increase. If we look at the US, Quicken Inc. is an entirely
on-line provider of mortgage cr