Homebuyers could be able to get 30-year fixed-rate mortgages from Irish building societies, such as those offered on the Continent, under legislation which passed committee stage in the Dβil last week. The Asset Covered Securities Bill 2001 will allow Irish financial institutions to ring-fence part of their assets, such as mortgages or public sector debt, and use them as collateral for AAA-rated bonds.
The institutions, which would not be regarded as an AAA-rated risk by international financial markets, would then be able to borrow "more cheaply and easily", said the Minister of State at the Department of Finance, Mr Martin Cullen. "For me, that is one of the most important effects of the legislation. For years, I could not see why we could not have mortgages like those available on the Continent," he told The Irish Times.
The pressure for the Asset Covered Securities Bill 2001, which completed second stage in the Dβil last week, has come from German financial firms based in Dublin's International Financial Services Centre. Based upon the German "pfandbriefe" bond, the concept has never defaulted in Germany, Austria and Sweden, and has in recent years become popular in France, Luxembourg and Spain.
The bondholders would not lose out even if the institution got into trouble, because they would have first call on the company's assets - even before the Revenue Commissioners.
Mr Cullen said the new measure will help Irish institutions to compete against EU financial giants following the introduction of the euro from January 1st. "The mutual recognition of credit institutions throughout the euro area and the advance of e-commerce which will enable institutions to penetrate a market without establishing a branch network all pose particular risk for the domestic mortgage sector. Such a situation could allow foreign institutions to 'cherry pick' customers and provide increased competition to the domestic mortgage sector," Mr Cullen said.
The measure will help to underpin the Government's own bonds, he suggested. "This will make all Irish bonds more attractive to large institutional investors, and will assist in maintaining activity in the Irish market when the State is not issuing bonds."
However, a senior banking source, who spoke on condition of anonymity, cautioned that Irish institutions are unlikely to make any use of the new legislation for some time to come.
Instead, IFSC-based German banks, such as Defpa, will issue bonds using assets lodged in Dublin. One of them is rumoured to be ready to issue a €1.5 billion (£1.18 billion) bond as soon as the legislation goes through.
"It would take a few big issues out of foreign institutions down in the IFSC before you really start to see any moves by Irish institutions," he told The Irish Times.
The arrival of 30-year, fixed-rate residential mortgages would revolutionise the Irish market, which has up to now had nothing longer than 10 years. However, these type of mortgages are not without their problems, since early repayment attracts heavy penalties. In Germany, for instance, the outstanding mortgage can transfer as part of the sale.
Labour's Mr Derek McDowell TD, who welcomed the legislation, said the penalties for breaching any of its rules - six months in prison on summary conviction and up to €2,000 in fines - were far too low.
