Ireland’s mortgage rules should allow distressed borrowers to write off their debt more easily and force banks to make losses, according to a central bank conference on mortgage restrictions.
Tif Mian, an economics professor at Princeton University, said Ireland’s “tough, creditor-friendly laws” meant households were bearing too much of the strict mortgage regulations and that it would be better for the economy if people could get out of theirs more easily debt out.
“If the purpose [of mortgage lending limits] is to smooth out the cyclical economy, it should be about risk sharing and not a narrow focus on bank balance sheet protection,” he said at the virtual conference on Tuesday afternoon.
“There should be escape valves for borrowers like debt relief. Risk sharing is really important for the real economy, but once you do that you burden creditors and that creates tensions over who we care more about.”
His comments come as the central bank reviews its controversial seven-year-old mortgage measures, which place tight caps on how much people can borrow to buy homes.
Critics have said the rules, which limit most borrowers to a mortgage of 3.5 times their income, are pushing thousands of people out of the housing market.
However, Central Bank Deputy Governor Sharon Donnery said the measures had succeeded in their stated aim of preventing a further spiral in speculative property credit prices such as those caused by the 2008 banking crisis.
Ms Donnery said the surge in property prices, which has made home ownership out of reach for many, was due to a slow supply response from developers and builders, rather than the central bank’s responsibility.
She also cited central bank policy’s success in protecting banks and borrowers during the Covid pandemic as justification for the continuation of credit limits.
“Our research tells us that borrowers with lower loan-to-value and loan-to-value ratios were less likely to request payment pauses in mortgage origination in response to the pandemic shock,” she said.
“This confirms earlier research from the time of the financial crisis, according to which the higher the loan-to-income or loan-to-value ratio, the greater the risk of default. to-value tools.”
The conference was organized as part of the Central Bank’s review of the Mortgage Measures Review to provide input from academic experts and policymakers to complement the public consultations and surveys already being conducted.
Ms Donnery and central bank governor Gabriel Makhlouf have given strong signals they are reluctant to relax mortgage lending limits to help people buy homes, despite reviewing the regulatory framework.
Responses to a central bank survey of 4,000 people last year suggested that high rents and limited supply were the main constraints on homeownership, not lending rules.
Only 11 percent of tenants who responded said the lack of available credit prevented them from obtaining a mortgage.
