Mortgages now account for 10 per cent of the €5.74 billion in loans currently on the books of the credit unions affiliated to Irish League of Credit Unions (ILCU), according to figures released this week.
They are keen to lend more, according to the organisation’s chief executive, David Malone, who wants the Central Bank of Ireland to relax the rules limiting how much of their assets can be committed to mortgage lending so they can provide “much-needed competition and customer choice in the hyper-concentrated mortgage market”.
The current limits for mortgage and small business lending by credit unions is 7.5 per cent of a credit union’s total assets. The limit is 15 per cent for larger credit unions but they have to get permission from the Central Bank. The ILCU-affiliated credit unions have total assets of €18.3 billion of which €15.3 billion are their members’ savings.
Nobody is predicting a crash just yet but it would appear to be an act of madness for the Central Bank to allow credit unions increase their exposure to a housing market as unmoored from economic reality as the Irish one
The credit unions are right about one thing. The mortgage market is hyper-concentrated and dominated by Bank of Ireland and AIB following the exit of Ulster Bank and KBC. Bank of Ireland is the biggest player with about 40 per cent of new lending, followed by AIB with 33 per cent and Permanent TSB has about 15 per cent, according to Davy. Between them they issue nine out of every 10 mortgages.
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[ Credit unions want easier lending rules amid strong mortgage demandOpens in new window ]
In aggregate terms, they lend about €12 billion a year in new mortgages to about 45,000 customers. With the best will in the world, it is hard to see how increased mortgage lending by credit unions could have any meaningful impact on competition in the mortgage market and the question the Central Bank has to ask itself is whether it is worth taking the risk of letting them try.
The mortgage market is closely entwined with the property market, which has been utterly dysfunctional for most of the past two decades and remains so. The Central Statistics Office released figures last week showing that house-price inflation is running at 9 per cent compared to overall inflation of 2.2 per cent.
Prices are now 10.8 per cent higher than they were at the height of the previous boom in April 2007, according to the CSO. We have become inured to reports pointing out that houses in Dublin cost as much if not more than equivalent properties in the world’s leading cities.
[ ‘Massive air of desperation’ among young people at scale of housing crisisOpens in new window ]
More than 80 per cent of estate agents here believe property prices are either “expensive” or “very expensive”, according to the Society of Chartered Surveyors Ireland, although that probably won’t stop them putting forward a well-argued case for why now is a good time to buy.
Most credit unions have a ‘common bond’ that dictates who can be a member. Usually, it’s a geographic area in which members must live and/or work
Nobody is predicting a crash just yet but it would appear to be an act of madness for the Central Bank to allow credit unions increase their exposure to a housing market as unmoored from economic reality as the Irish one.
[ Credit union regulators should allow ‘prudent’ lending increase - reviewOpens in new window ]
Leaving that aside, there are a number of characteristics of the Irish mortgage market that make it a place that many fear to tread and have caused others to depart. The main one being the difficulty of repossessing a home when a mortgage is in default. The legal and cultural obstacles are such that the dirty work of resolving “non-performing” mortgages gets left to a handful of specialist finance companies that are prepared to take the heat.
Most credit unions have a “common bond” that dictates who can be a member. Usually, it’s a geographic area in which members must live and/or work. The largest credit unions are the ones where the common bond is working for a large State organisation such as the Health Service Executive or An Garda Síochána.
These bonds would be sorely tested if a credit union was to seek repossession. It is hard to see the Garda credit union evicting a member of the force and selling their home.
That said, credit unions have had to deal with loan defaults and bad debts since the first one was established in Dublin in 1958 by teacher Nora Herlihy along with Seán Forde who worked for a bakery and civil servant Séamus P MacEoin.
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Over the following 64 years, hundreds of thousands of people who were shut out of the banking system for one reason or another have been able to save money and obtain loans thanks to credit unions.
Post the 2008 financial crash, and the collapse of a few credit unions, the Central Bank droveconsolidation of the movement. Since then, a lot of smaller credit unions have been rolled up into larger ones, reducing the overall number from 419 to 254, according to a report from the regulator in 2019.
Despite this, income levels across the sector have fallen as members tend to put money on deposit rather than take loans, and the sustainability of the model has been questioned.
The move into mortgage and small-business lending by credit unions in recent years is a response to this, and the latest lobbying to be allowed expand further into these areas is driven by the same imperative to grow.
If the Central Bank decides the risks involved in letting credit unions expand their presence in these areas are not justified, then a question arises as to what can be done instead to ensure the viability of a community-based financial services provider with 3.6 million members that attracts very significant support across the political spectrum.
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