There was some official concern over 100 per cent mortgages. Many did not want to know
DURING 2005, banks and building societies offered first-time buyers 100 per cent mortgages. Only one political figure in government at the time expressed concern: Noel Ahern, minister of state at the Department of the Environment with responsibility for housing.
Ahern, brother of then taoiseach Bertie Ahern, wrote to all the banks warning them they were abandoning prudence by increasing loan-to value ratios and not requiring any deposit. Ahern’s concerns related to the possible inflationary effect of the move and the nightmares that young families who went all-in on 100 per cent mortgages would be in if the property bubble burst. He was prescient and right on all counts. He waged a battle for over a year – to no avail. His government colleagues didn’t heed him: nor did the upper echelons in Finance, or the Financial Regulator’s office.
Anyone who followed minister for finance Brian Cowen’s speeches at the time would have been familiar with predictions of a “soft landing”.
That was the official line from the senior levels at Cowen’s department, and the Financial Regulator’s Office. Banks were solid and adequately capitalised. Stress tests proved this. There was no need for intervention when banks introduced 100 per cent mortgages. The arguments were that take-up of such mortgages was small; that new buyers were already doing it through credit union loans and dig-outs from parents. The conclusion was the inflationary effect would be small.
Another factor was at play. In an internal note from a meeting, a senior Finance official stated: “The housing market is a domestic risk factor for the Irish economy. The market it delicately poised and any Government intervention could make matters worse. But the most likely scenario is for a soft landing.”
Other documents seen by The Irish Times that formed part of the Nyberg report on the banking crisis last April show there were some officials in the Department of Finance who consistently raised flags about a housing market out of control. Their concerns were ignored or suppressed.
The documents, prepared for replies to parliamentary questions and for ministerial speeches, included references to reports by the Economic and Social Research Institute (ESRI), Central Bank and International Monetary Fund. They had all cautioned about possible shocks that could cause a dramatic turnaround in the housing sector and economy.
Other senior officials edited out those references on the basis they sent out the wrong message. “This type of material is not appropriate or suitable for a ministerial speech,” wrote one. “It is positively alarmist in tone in some areas . . . If the minister were to make this speech, one can only imagine what the market reaction might be.” Of course, the alarmist tone was 100 per cent correct.
The Financial Regulator’s office message was even more wan. It said it was advising banks and borrowers to exercise prudence. Of course it fell on deaf ears.
In the event, there was a large take-up of 100 per cent mortgages (35 per cent of all new mortgages in the first six months of 2006). It did have an inflationary effect. It accelerated the dangerous bubble.
“The likelihood is that the mortgage market is to some extent being driven by addiction to indefinite high growth rate increases”, warned an Environment official in 2005.
It is clear the minister and his officials did not want to frighten the horses. If they had intervened then it might have pricked the bubble and caused trouble. But it would have been minor compared to the cataclysm three years later due to failing to act.
