Shortage of Mortgage Funds

In the UK it is becoming increasingly difficult to obtain mortgages. First Direct suspended new mortgages recently as have Halifax. The number of available mortgages has been reduced by nearly 40% this week. This is because of the credit crunch and the non-availibility of funds on the wholesale interbank market. This has forced the rise in the cost of this money which is being passed on to the consumer. First Direct claim that they have suspended their new mortgages because they cannot cope with the demand and need to suspend issuing new loans to be able to deal with the backlog. In the UK part of the demand arises from lenders coming off discounted fixed products and looking for cheap alternatives. These are becoming less and less available. However the problem is not only for people refinancing but also for purchasers. According to the Financial Times one third of housing deals are falling through because of the non-availibility of funds..

In Ireland while house prices are still falling the rate of the reduction is less than what it was. The fall was 1.2% in November, 1.4% in December, .8% in January and .7% in February. However if mortgages become as unavailable as they are in the UK and if the cost of lending rises this will obviously add to the problems with the housing market and can only lead to a more rapid rate of decrease in the cost of property.

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Problems in Obtaining Mortgages

Credit is becoming more difficult to obtain because of the rise in the cost of inter-bank borrowing since last Autumn. This has led to a rise in the cost of money to borrowers. People on tracker mortgages won’t be affected. However people looking for new tracker mortgages will have to pay more. As the credit crunch continues the cost of borrowing will rise further. As a consequence lending criteria will get stricter and the loan to value ratio will fall. In Britain some of the lenders, such as First Direct, have stopped lending because of the demand for their products. This arose with people coming off fixed rates who were looking for attractive alternatives. First Direct became inundated with applications. It was a question of either increasing interest rates dramatically to discourage applicants or withdrawing loans to new customers to enable them to clear the backlog. However in Ireland the demand for residential mortgages is at its lowest in 14 years according to Central Bank statistics. This decline reflects the decline in house sales as shown by the recent figures published by Permanent TSB and ESRI. However these figures show that the rate of decline was not as sharp in January/February as it was in November/December. 

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Switching Mortgages in the UK

In the UK borrowers wishing to switch mortgages are running into problems as a consequence of Lenders pushing rates up and tightening lending criteria. Lower property valuations is intensifying the pressure on homeowners to find new mortgages forcing borrowers to stay with their existing lenders at often unaffordably increased interest rates. People who have invested money in renovating property find that the revised value does not cover the work done. Also high loan to value mortgages have become unavailable

Tax Relief on Mortgages

Since 2006 there has been a maximum tax relief benefit accruing to first time buyers of €2,400 per year for couples purchasing homes in respect of mortgage interest relief. This amounts to €200 per month between the couple. This maximum benefit is dependent on the mortgage being approximately €400,000 and an interest rate of 5%. If the amount of the mortgage and/or the interest rate is less than this than this the tax benefit will be less. The tax benefit amounts to 12% of the interest liability. The tax benefit at this level will last for 7 years including the first year.

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decrease in mortgages

The latest IBF/PwC Mortgage Market Profile shows that there was a 22% fall in the number of mortgages approved in Ireland in 2007 as against 2006 and a 15% fall in the value of the mortgages approved. The quaterly details of approved mortgages both in number and value are set out below  

 

2006

2006

2007

2007

%diif'07/'06

 

Number

Value (m)

number

Value (m)

number

Value

1

47244

8437

38,236

7,809

0.19

0.07

2

53449

10130

41,151

8,733

0.23

0.14

3

54623

10962

40992

8984

0.25

0.18

4

48637

10343

37,719

8,282

0.22

0.20

total

203953

39872

158098

33,808

0.22

0.15


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grading mortgages

In the UK the Chancellor, Alistair Darling, is proposing to introduce a system of grading mortgages in order to revive the market for securitised mortgages which has been frozen since last summer following the sub-prime crisis. The proposal involves giving a “gold standard” kite mark to mortgages of a higher level of creditworthiness and quality including mortgages with a low loan-to-value ratio. Reviving the market for wholesale mortgage financing – the sale of mortgages by lenders to long-term investors – will provide much needed wholesale finance to lenders and give some stimulus to the housing market. Will the Irish Government be obliged to do something similar for the Irish market? Irish Life & Permanent recently issued satisfactory results for 2007. However there were suggestions that this bank would have liquidity problems later in the year causing its share price to drop substantially.

Alternatively might the Irish Government introduce a U.S. style Government backed agency which lends money to banks in return for mortgage collateral?