The Central Bank has published an economic bulletin that concluded that mortgage insurance costs in Ireland are relatively high and expressed concerns about its impact on recent efforts by the regulator.
It notes that some have recommended that a mandatory home loan insurance might be a way in which people could borrow over the 20pc loan to value cap placed by the Central Bank earlier this month.
It said it is important that any mandatory introduction of mortgage insurance (MI) would be accompanied by a robust prudential framework for the supervision of these companies.
It said that the LTV limits are being introduced in order to increase the resilience of banks and households to shocks in the property market, and to dampen the pro-cyclicality of property lending.
“From a macro-prudential perspective, mortgage insurance does not remove the risk of a systemic crisis, but shifts this risk from the lenders to the insurers. If this risk is concentrated in a small number of mortgage insurers, or in a State-owned insurer, this could increase the systemic problems in the underlying market (Joint Forum, 2013). This is particularly the case where the insurers are domestic, and the risk and accompanying liability remains within the State,” it said.
It is important that any mandatory introduction of MI would be accompanied by a robust prudential framework for the supervision of these companies. This would involve the development of a specialised microprudential framework, which would take some time to put in place and would have to consistent with the new Europe-wide Solvency II framework, the Bulletin said.
Consumer protection issues are another concern, such as ensuring that the pricing of MI is “clear and transparent” and requiring that borrowers can choose which mortgage insurer provides the cover. Another area to be considered is the fact that under most mortgage insurance policies, a claim is not payable until after the borrower has defaulted on their mortgage and the property has been foreclosed and sold.
“This feature of MI would need to be adapted to reflect the nature of the Irish market in this respect,” the Central Bank said.
Who bears the risk is another concern outlined in the letter. From a macro-prudential perspective, the author, economist Niamh Hallissey notes that mortgage insurance does not remove the risk of a systemic crisis, “but shifts this risk from the lenders to the insurers”. If the risk is concentrated in a small number of mortgage insurers, or in a state-owned insurer, this could increase the systemic problems in the underlying market the letter says.