Cents & Nonsense:Fresh meat is needed to feed the insatiable appetite of the international abattoir of debt. Our Government has been waving a big juicy carcass in the air - your mortgages - for some time, writes Margaret E Ward.
Recently, the scent was picked up by lenders to the credit-troubled. These sub-prime lenders are flooding into Ireland as the market for these flexible mortgages implodes in the United States. Irish players are also relaxing their credit offerings to consumers.
Sub-prime mortgages are a wonderful thing when offered responsibly. They allow those who have difficulty affording a home - first-time buyers, the self-employed and those with patchy credit or employment histories - to get a foot on the property ladder.
The problem is that there is a limited supply of those borrowers who are actually in a good position to make repayments. To feed the hunger, lenders must continually loosen their credit standards to get to the bottom of the barrel.
The United States is experiencing the final result of this extreme "democratisation of credit". More than 130,000 people a month are being forced from their home due to foreclosures.
Ten years ago, US loan providers started offering more flexible, affordable products. These included sub-prime mortgages; low introductory rates that moved swiftly upwards from year two; interest-only loans; and extending the length of the loans from 20 years to 50 years. Despite the feelgood factor it generates, these loan designs only work when house prices are rising.
Easy money is an irresistible lure for those desperate to own a home. Loose lending practices make it easy for borrowers to become victims of mis-selling. Is it really a good idea for people to proclaim an income to mortgage lenders without proving it as they can with many sub-prime loans? What about 100 per cent or more mortgages with no deposit required?
Lenders have good reason to seek out more mortgages no matter how bad a risk they might be. Home loans are more than just a nice source of income for them. They are also debt that can be repackaged and sold on to investors as a covered bond or asset covered security (ACS).
Good- and bad-risk mortgages are needed to make this work. Sub-prime is a dreadful, dehumanising word but it does describe the financial institutions attitude to these less desirable borrowers: "Listen, you're no filet mignon buddy, you're just the intestines, snout and ears." So, these offal mortgages are dismembered in financial abattoirs and sold on to investors as covered bonds or ACSs.
Thousands of loan carcasses, both good quality (prime) and end-cuts (sub-prime), are cut up into pieces and repackaged to appeal to every investor.
The mortgage "variety packs" that mix good with not so good - fillet mignon, T-bone steak, liver, tongue - appeal to bond investors, who want to spread the risk and ensure a regular payment (yield).
Offal-only (sub-prime) packs are the riskiest as they can spoil faster than more expensive cuts. Investors hoping for bigger payouts are more willing to take on this risk. Investors love these products as they are relatively stable and provide a decent regular payment.
What is good for investors is not always best for borrowers. The insatiable demand for ACSs means carnivorous companies will roam the earth looking for their next big feed and our Government will do little to stop them or protect us.
In fact, the Asset Covered Securities (Amendment) Bill 2007, recently debated in the Dáil, shows the Government is more interested in protecting big business. The amended Bill proposes increased protection for investors and ensures the competitiveness of Irish-based banks. There was no mention of protection for borrowers.
Ireland's covered bond/ACS market is a jewel in the financial services crown. It is the sixth-largest in Europe and, in 2007, it has an estimated worth of €10 billion. That adds up to many jobs and votes.
So, what does the sparkling Emerald Isle look like to a hungry, debt-eating market? Since 1997, Ireland has experienced the highest rate of house price inflation in the developed world. "Hmm. The Irish have lots of money, are obsessed with property ownership, property sales have started to slow and it is an election year. What could be better?"
Politicians and financial institutions know that the only way to restart the stalled property market - on which our booming yet fragile economy is so strongly dependent - is to ensure loans are easier to obtain for those on the margins. "Come on in easy credit providers, the water is just fine."
I have one word for them: Repossessions.
