Ireland is not Denmark when it comes to mortgages

We know Ireland isn’t Iceland. It’s not Greece, and definitely not Spain. Now we know that when it comes to mortgages, at least, Ireland isn’t Denmark. A Bill (.pdf) introduced by Senator Sean Barrett designed to add the stable Danish mortgage model to the obviously unstable Irish model was shot down by Minister Noonan this week. Simply put, the Bill’s idea is to allow a balance principle to regulate mortgage credit. A 2007 IMF paper on the Danish market (.pdf, again) noted that

The Danish mortgage system is widely recognized as one of the most sophisticated housing finance systems in the world. Through the implementation of a strict balance principle, the system has proved very effective in providing borrowers with flexible, transparent and close-to-capital markets funding conditions. Simultaneously, as pass-through securities, mortgage bonds transfer market risk from the issuing mortgage bank to bond investors. Lastly, strict property appraisal rules and credit risk management by the mortgage banks have also historically shielded mortgage bonds from default risk.

Naturally enough, the Minister felt the need to shoot the Bill down.

The Minister’s reasons are outlined here, but essentially they are:

1. We are not, nor were we ever, Denmark.

2. Changing wholesale to this system has risks, most of which I won’t go into here, but the Danes give defaulting households 6 months and we’d really like that to be longer, say a year.

3. Changing to this system would imply loans at 80% LTV, most banks are at 92% LTV, this would make it more difficult for first time buyers.

4. We’re in the middle of negotiations on the various capital requirements directives, this could throw a spanner in the works with the EU.

Senator Barrett is to be congratulated for bringing a fresh perspective to the Mortgage market in Ireland. It’s a real pity the Bill didn’t get more traction, but hopefully parts of it may make it into other pieces of legislation.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

17 replies on “Ireland is not Denmark when it comes to mortgages”

Sean is to be congratulated. He shows the quality that independent thoughtful senators can bring. To be fair the rest of the debate was quite good also – John Gilroy in particular.
For those who are interested, I have uploaded on my blog ( ) some of the background material that was circulated to the oireachtas members, including some reviews of the danish market and the original explanatory memorandum.
We might also note that the technical legwork, as for the Fiscal Responsibility Bill by Sean earlier on, was done by Dr Charles Larkin. Again this shows that with good senators well resourced we can get a senate that does its job in terms of acting as a sounding board and a thoughtful resource. Rather than abolishing the Senate can we think of one that has 60 of the caliber of Sean (for whom let it be clear I endorsed and whom i campaigned for) and the other independent university senators?

Thanks for the heads up – I just wanted to point out that the proposed bill still imposes limits that are not sufficient to prevent the creation of another housing bubble (in the distant future. Why is it that all politicians seem to be always so keen in creating housing bubbles?). For example, the proposed maximum term of a loan is 30 years (35 for non-profit rental housing, youth housing and private housing co-operatives), whereas a 20 year limit will be more reasonable (if memory serves, historically, the average duration of a loan is in the 10-15 years interval, and it only has been recently that -for some reason that I cannot understand- people have deemed reasonable to get in debt beyond that amount of time).

I would also like to see a limit on the monthly payment (with the current interest rate) as a given fraction of the current income of the borrower(s) – as in one third of the current income. I know that this measure is a bit tricky, as both interest rates and incomes can change quite rapidly; but it would certainly help in preventing people from getting too much in debt.

Also, regarding point number 3, I must say that in one thing I must agree with Noonan: This kind of measures would make it a lot more difficult for first time buyers to fall for an obvious Ponzi scheme.

Obviously, tightening regulation after a massive crash can have negative effects in the short to medium term notwithstanding that it is a good policy in the long run.

However, 80% LTV is not so bad if the V is not exorbitantly high. Anyone who has read John Corcoran’s posts on the fatal flaw in the market value model will understand why the V is the big problem.

Furthermore, Minister Noonan needs to realise that the banks are operating very tight criteria for mortgage approvals as things are. He may be rightt hat we should not give them another excuse to further choke supply, but he should ace up tto the fact that his current policy is not leading to more lending in the housing market which, given the pent up demand for starter homes, is necessary and desirable.

Wouldnt this proposal result in lower property values/ prices arising from the discipline of credit???? (not that this isnt the eventual outcome)
I am not against this at all, but I am precious about my negative equity!!!
Perhaps it isnt just the banks that need to face up to this.

Reducing LTVs will help FTBs, over the long-run, as they will owe less and repay less interest. They need to be convinced that having a 20% deposit is a good thing.

Would a period of price control be (a) legal, (b) helpful, & (c) if so, to whom ?
A floor on lower prices, and a limited potential for inflating values, tying things in a more realistic manner to peoples earnings ?
After all, pushing up home prices unlimitedly is as ethically unsound as pushing up food prices beyond affordability.


There is a temporal aspect to this and a balance to be struck.
How do we bring future housing commitments to their point of price stability in the long run, while not screwing or abandoning present day and past commitments that people have taken on with their mortgages?

With Govt waiting on the sidelines, there isnt much leadership going on explaining or arguing for a specfic outcome….

And, to state the obvious, several houses near my own, ex-council, small 3-bed terrace, selling for £20,000 in 1995 sold for €350 to >400k five years ago.
A system of realistic writedowns will have to be implemented.

re Jose –
Why is it that all politicians seem to be always so keen in creating housing bubbles?).

In Ireland’s case, it seems to have created an attractive destination for private investment funds, both local & european.

Is Spain stil Spain? Or Greece still Greece? They didn’t look like it the last time I was there (recently).

The Minister did not accept the Bill as proposed by Senator Barrett for the following reasons:
•It is far from clear that the Danish system could be transposed to the Irish situation. It would necessitate a total shift in mortgage banking policy and regulation.
•For the proposed system to work, it would need to generate a critical mass and would need legal certainty. It is not clear that there would be sufficient interest in the purchase of Irish mortgage bonds at this time.
•Concerns have been expressed about how the Capital Requirements Directive may treat bonds such as those used in the Danish system.
•His Government “is very supportive of the covered bond structure we have in place in this country which has proven to be a robust and valued framework by international investors.”
•There is no quick fix solution to the Irish banking and mortgage issues and he considers that the direction being taken by the Irish Government is appropriate at this time and he is satisfied that the initiatives currently underway will resolve the situation.
These are the facts and the full text of the Ministers speech to the Seanad is available here:

“Why is it that all politicians seem to be always so keen in creating housing bubbles?”

Because equity release from houses gave middle class people a comfortable lifestyle when their real incomes were declining.

People were getting deeper into debt but they actually felt wealthier. At the same time they kept spending the free money and the domestic economy and the tax take was buoyant.

This applied in the USA and UK especially.

The problem for Mr Barrett is that Mr Noonan is a teacher. He can’t grasp this. Nor can he grasp that Ireland is spending so much time begging for pittance that it is missing all kinds of opportunities in terms of reform. And this is what we get

Ireland spent 800 years longing for European rescues that never came. It even aligned itself with a European religion in the hope that would help it – it didn’t.

Ireland needs to cop itself on. Stop faffing about with Europe and start some real reform.

@zhou_enlai Says:
October 19th, 2012 at 10:31 am
‘Given the pent up demand for starter homes’

What pent up demand? How are you measuring it?

Nor is Ireland Zimbabwe.

Underwater mortgages that are in default are the elephants in the room.

The domestic banks are paralysed and cannot engage in foreclosures because it would then become blatantly obvious that they are bankrupt and the Irish Gov’t will be coughing up tens of billions every year to keep them afloat.

The Irish Gov’t is very anxious to declare the crisis over now or will be over when Frau Doktor Angela Merkel opens up the purse strings. It will take a lot of rosary bead fingering before public opinion in Germany allows Merkel or her successors to come to the aid of the severely afflicted on the periphery.

It is not so much that our Gov’t is lying but that they are in deep denial quite incapable of dealing with their ongoing deficits and terrified of offending their supporters. We have trained our politicians over many election cycles that papering over the cracks is a sound strategy. In the final analysis we get what we vote for.

A good example was the sentiment voiced by Gov’t when they said “If we do not backstop our banks and their creditors we will be shut out of international money markets. Then neither the Gov’t or the banks will be able to borrow and lend to individuals or businesses.” . In other words we want to keep the gravy train rolling at all costs.

Left out of their thinking was that banks do not lend to individuals or businesses unless the collateral is sound. You say that they did exactly that from the mid nineties to 2007 and you are right. But even Irish bank management recognise a banking collapse when it hits them over the head. Now they are acting responsibly by not lending and it is up to the Irish Gov’t to stop ladling out billions without conditions to banks that are acting rationally. Only Gov’t regulation and withholding of funding will bring about change.

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