First time buyers default a lot less than Second time buyers

[Brendan Burgess]

[broken link removed]

New research from the Central Banks suggests that the default rate is about 1/3rd less, when they control for LTI and LTV and other factors. (14.9% of second and subsequent buyers default compared with 10.3% of FTBs)

In other words, First time buyers who bought a house in 2006 on 4 times income and 90% LTV over 30 years are less likely to default than second and subsequent buyers who bought a house in 2006 on 4 times income and 90% LTV over 30 years


[other researchers] ... cite a number of reasons why this might be the case.
Firstly, it may be that, due to a lack of credit history, banks apply more thorough lending evaluations and stricter appraisal criteria to FTBs.
This may lead to better credit allocation outcomes.
Second, if FTBs wish to move in the future and are concerned about the impact of default on their future credit access, they may be more active in trying
to keep up with mortgage payments.
Thirdly, becoming an SSB may infact reveal a higher tolerance for risk relative to borrowers who remain as FTBs. This increased risk appetite may lead to
higher probability of default for SSBs.

 

[Brendan Burgess]

The other key
variables are LTV and LTI. We nd that both of
these have a positive impact on default: higher
LTI and LTV at origination are associated with a
greater likelihood of mortgage default. By this evidence,
limits on LTI and LTV would reduce the
likelihood of default. For the average rst time
borrower, model estimates show a 10 percentage
point increase in LTV from 80% to 90% would increase
the probability of default by 1.06 percentage
points.

 

[Brendan Burgess]

What is a First Time Buyer? If I bought a house 20 years ago and I am still in it, then I am presumably a FTB and very unlikely to default. But they control for year of purchase. So if I bought a house 10 years ago, I am still a First Time Buyer. If I bought a house 20 years ago and traded up 10 years ago I am a Second Time Buyer.

Maybe if I had a mortgage for 10 years and never missed a payment, my mortgage lender probably is happy to give me a new mortgage without checking me in too much detail.

 

[44brendan]

Maybe if I had a mortgage for 10 years and never missed a payment, my mortgage lender probably is happy to give me a new mortgage without checking me in too much detail.

These days are gone. There is no longer any local discretions for mortgage approvals. Every application must be accompanied by a template repayment capacity calculation (stressed). In a tight repayment scenario the approver will take the track record into account. However, this would not be acceptable where repayment capacity analysis does not meet the minimum hurdle. I am not aware of the stress rates applicable to all banks, but we would apply a 6% stress to mortgage lending a plus 3% stress on other borrowings.

 

[epicaricacy]

Do the Second time buyers stats include BTL or PPR only? If it includes BTLs one is not comparing like with like. I wonder what effect the abolition of TRS in Jan 2018 will have on FTBs who bought in 2006? I imagine e.g. a 300 euro monthly increase on a 310,000 mortgage will eradicate any differential between the default stats for Ftbs and second time buyers.

 

[Sarenco]

The research letter itself states that it relates only to primary dwellings and therefore presumably excludes rental properties.

I must confess that I find the research wholly unconvincing. It may well be the case that statistically the default rate for FTBs is lower than the default rate for other buyers but I would need to see some plausible explanation as to why that would be the case before accepting that there is something intrinsic about FTBs that leads to lower default rates.

The timing of the release of this supplementary research would suggest to me that the Central Bank is considering adjusting the proposed new requirements to provide for a higher LTV and/or LTI for FTBs.

Good news for FTBs to be sure but bad news for expanding families stuck in unsuitable small properties bought at the height of the (first) boom/bubble. Come to think of it, would the dilution of the proposed new requirements for one cohort (FTBs) not substantially neuter the effectiveness of the proposals generally?

 

[44brendan]

Fair comment Sarenco. These are some of the problems and unintended consequences of broad generic rules and categorisations. Not all 2nd time buyers are coming to the market with buckets of equity in their existing properties.
I fully agree that if rules are imposed there should be no differentiation between FTB's and any other category of borrower.

 

[Sarenco]

I would be of the opinion that any research that is being relied upon by the Central Bank to justify a differential treatment of categories of borrowers should be published in full and subjected to rigorous peer review. Intuitively I can see no reason why default rates among FTBs should be any lower than default rates among other borrowers and I would strongly suspect that any correlation between FTB status and default rates is driven by other factors. Perhaps I am being overly cynical, but it just seems a little too coincidental that this new research letter is published by the Central Bank as soon as the consultation period ends and just happens to support the (politically informed) views of the Minister for Finance.

To be honest, I didn't have particularly strong views about the Central Bank's requirements as initially proposed. However, I am starting to have concerns that changes to the proposed requirements could have significant unintended consequences. In addition to the suggested special treatment of FTBs, I note that a number of submissions are suggesting that a transitional period should be introduced or that the requirements be introduced on a phased basis. However, this would surely only exacerbate the current problem as potential purchasers sought to front-run the implementation of the new requirements thus causing a further spike in prices and increasing the risk of another crash.

 

[Brendan Burgess]

I note that a number of submissions are suggesting that a transitional period should be introduced or that the requirements be introduced on a phased basis. However, this would surely only exacerbate the current problem as potential purchasers sought to front-run the implementation of the new requirements thus causing a further spike in prices and increasing the risk of another crash.

Hi Sarenco

I think that the phasing in would have to be gradual. This was my own submission on this topic to avoid the cliff problem which you refer to.

The limits should be phased in

Any change such as this will require a lot of adjustment. The initial limit should be 90% LTV with a gradual reduction by 1% every 6 months to reach 80% after 5 years.
This phasing in would allow the Central Bank to monitor the impact of the limits for unforeseen consequences and allow them to tweak the policy.

 

[Sarenco]

Hi Brendan

A phasing in period that was graduated on that basis would certainly mitigate the cliff problem but I suspect that it would be very difficult to monitor and I'm not sure that it would be very practical. For example, would a loan approved in month X have to be reduced by a certain per cent prior to drawdown in month Y?

Also, is there a touch of "Lord, make me chaste but not yet" about a transitional period of that duration?