HML's July 2014 Ireland Commercial Bulletin tells you everything you need to know about the country's economy and banking sector, including unemployment, bank profits and interest-only mortgages.

1. JULY 2014
The Central Bank of Ireland has launched a consultation into
the sale of borrowers’ mortgages to investors
HML Ireland managing director David Kelly has spoken to the
Irish Independent about interest-only mortgages
Asking prices for residential properties have experienced
positive growth for the first time in eight years, according to
Myhome.ie

2. HML News
David Kelly speaks to the
Irish Independent about
interest-only mortgages.
You can read his article here and below.
The Central Bank recently published a paper
on interest-only mortgages in Ireland. It’s a
timely contribution to the mortgage debate
which throws a spotlight on a market sector
which has evaded an awful lot of scrutiny so
far but which holds real challenges for banks
and customers alike.
Interest-only mortgages are home loans where
the borrower only pays the interest on the loan
each month. Because monthly payments don’t
include repayments of the amount borrowed,
monthly repayments are substantially lower for
as long as the interest only arrangement lasts.
During the house price boom, interest-only
presented an easier route to home ownership.
First-time buyers especially opted to take up
the offers of an interest-only period, often for
between one and three years. It was seen as a
transitional arrangement which allowed new
homeowners to deal with all the attendant
costs of setting up a new home. At the time,
the risk for either bank or borrower was
considered negligible because the consensus
was that house prices could only go upwards!
If most interest-only products in Ireland were
designed for a short period, some customers
did secure long-term interest only loans. For
many others, interest-only arrangements have
been agreed with their banks to prevent them
going into arrears since the crisis began.
Unfortunately, even after the Central Bank’s
paper yesterday, we don’t have great statistics
on the overall level of interest-only mortgages
in the Irish market and this is an issue which
needs to be addressed.
It’s instructive to look across to the UK where
long-term interest-only loans are quite
common. In fact as many as one in four of the
UK’s 11.2 million mortgages are owner-
occupied interest only mortgages, typically for
the life of the loan. According to research from
the UK financial regulator, the Financial
Conduct Authority, nearly half the people who
have interest-only mortgages may not have
enough money to pay off the loan when it
matures.
Of most pressing concern to the FCA in the
UK are the 60,000 borrowers whose loans will
mature between now and 2020 and who don’t
know how they will repay their loans. The fear
for many of these people is that they will need
to sell their homes to pay off their mortgage
but they won’t have enough left over to
purchase an alternative home.
What lessons are there for customers on
interest only in Ireland? Clearly for anyone
who took out an interest-only loan and hasn’t
put a repayment strategy in place, it’s time to
review their financial position and to talk to
their bank. They need to understand that
interest-only mortgages are not sustainable in
the long run because mortgages have to be
repaid. They also need to understand that the
current low interest rate environment is the
exception not the rule and as sure as night
follows day, interest rates will turn upwards
again. So, they would be well advised to take
advantage of this period of low rates to make
serious inroads on the principal outstanding on
their mortgage.
The first step from a customer perspective is to
acknowledge that they need to do something.
For example they could look at any savings
which they might have which could be used to
reduce the principal outstanding.
Continued over the page

3. HML News
As banks make more progress on the overall
arrears issue they will move on tackle other
potential problem areas including long-term
interest-only customers.
Perhaps the main lesson is not to wait for the
crisis to develop but to take pre-emptive
action. In the UK, the FCA, the Council of
Mortgage Lenders and the Building Societies
Association are now working together to
ensure lenders contact their interest-only
borrowers in order to prompt them into action.
Here in Ireland encouraging lenders and
borrowers to think ahead would be a good first
step.
HML CIO Kim Brien speaks
exclusively to Silicon
Republic about IT strategy.
You can read the article in full here, while one
of the main questions and answers can be
found below.
HML manages billions of euro worth of
assets – does that put a greater onus on
your compliance efforts, and how do you
go about managing them?
We take our regulatory responsibilities very
seriously. Whether you are managing €1
billion or €40 billion of assets, you still have to
be compliant. Our risk management has been
reviewed by rating agencies including Fitch
and Standard and Poor’s (S&P) and viewed to
be the best there is .
“HML's risk management discipline is robust
and operates in a controlled environment, in
our view.” S&P servicer evaluation report,
September 2013.
They could undertake a financial review and
see how much of their current spending they
could divert to making repayments on the
principal outstanding. If they have tracker
mortgages, they could, for example, choose to
take advantage of the increased disposable
income they have as a result of recent tracker
rate reductions to begin making repayments
on the principal.
Ideally, interest-only borrowers need to contact
their lenders and examine the implications of
moving to the more normal model of a capital
and interest mortgage where the monthly
repayments contribute to the eventual
repayment of the amount borrowed as well as
the interest. Inevitably, a switch like this will
lead to a significant increase in monthly
payments compared to an interest-only
arrangement. However, if that proves too
challenging, they may find their bank more
willing than they might expect to consider
restructuring the mortgage to enable the
higher payments to be met.
Such restructurings might be based on
extending the term of the mortgage, deferring
payment of part of the mortgage, capitalising
any arrears which might be present or splitting
the mortgage and repaying capital and interest
on one portion while the other portion is
“warehoused”. The sooner a long-term
sustainable payment plan, designed with the
bank’s support is put in place, the better.
Even if customers don’t take the initiative to
contact their bank, it’s unlikely that the bank
will let them continue on interest-only loans
indefinitely if they can avoid it. The current
interest of the Central Bank in this issue
confirms that. Unlike the UK, in Ireland most
interest-only loans are open to review at
regular intervals. A sustainable mortgage
solution with repayment of the capital as its
goal is the key objective here.

4. HML Ireland Update
Date reflects what the statistic was during that period, rather than when the statistic was published
Consumer Price Index (Central
Statistics Office)
JUNE ‘14
0.4%
MAY ‘14
0.4%
APRIL ‘14
0.3%
European Central Bank (ECB)
Base Rate
JULY ‘14
0.15%
JUNE ‘14
0.15%
MAY ‘14
0.25%
Unemployment Rate (Central
Statistics Office)
JULY ‘14
11.5%
JUNE ‘14
11.6%
MAY ‘14
11.8%
Average National House Prices
(Myhome.ie)
Q2 ‘14
Up 1.3% from Q1
€190,216
Q1 ’14
Down 0.7% from Q4
€187,736
Q4 ’13
Down 0.9% from Q3
€189,086
Arrears
(Central Bank of Ireland - CBI)
PDH – total
PDH – 90 days+
BTL – total
BTL – 90 days+
Q1 ’14
132,217
93,106
39,361
31,048
Q4 ’13
136,564
96,474
39,250
30,706
Q3 ’13
141,520
99,189
40,426
31,227
Home Repossessions (CBI)
PDH
BTL
Q1 ‘14
1,116
568
Q4 ‘13
1,014
503
Q3 ‘13
1,050
516

5. Industry Statistics
Consumer Price Index
The CPI in June was 0.4% higher than June
2013, remaining the same on May. Notable
upward pressures came from the education
(4.5%), alcoholic beverages and tobacco
(4.1%) and miscellaneous goods and services
(3.9%) sectors.
This was partially offset by declines in
communications (-4.7%) and clothing and
footwear (-3.4%).
ECB Interest Rate
The ECB base rate remains at 0.15%. Mario
Draghi, president of the ECB, said:
“Based on our regular economic and monetary
analyses, we decided to keep the key ECB
interest rates unchanged. The latest
information signals that the euro area
economy continued its moderate recovery in
the second quarter, with low rates of inflation
and subdued monetary and credit growth.”
Unemployment Rate
The unemployment rate decreased by 0.1%
between June and July, standing at 11.5%.
This represents 382,800 people out of work. In
the same month in 2013, the unemployment
rate stood at 13.0%.
House Prices
The national average house price in Ireland
stood at €190,216 in Q2 2014, a 1.3%
increase on the previous quarter, according to
Myhome.ie’s analysis of asking prices.
This is the first positive price growth in almost
eight years.
Commenting, Angela Keegan,
managing director of Myhome.ie,
said: "It’s heartening to see asking prices
nationally rise for the first time in eight years.
While this is an important landmark on the
road to recovery, we are still much closer to
the start of that journey then the finish.
“The average mix-adjusted asking price in
Dublin is now 34% higher than the national
figure. This is on a par with trends seen at the
height of the boom when the difference stood at
35%, albeit prices are at a much lower base.”
Arrears
Principal Dwelling Houses (PDH)
The number of PDH mortgage accounts in
arrears declined by 3.2% between Q4 2013 and
Q1 2014. Out of the total mortgage accounts,
17.3% were in arrears, representing a total
132,217.
There was a fall of 3,361 of the number of
accounts in arrears of more than 90 days, the
Central Bank of Ireland said.
However, accounts in arrears of more than 720
days increased to 35,314, representing almost
68% of outstanding arrears on PDHs and
balances of €7.4 billion.
Buy-to-let (BTL)
The number of BTL mortgage accounts in
arrears increased during Q1 2014 to 39,361,
representing 27.2% of accounts. However,
there was also an increase in the number of
those in arrears of more than 720 days,
representing 9.2% of accounts with balances of
€4.2 billion.
Home Repossessions
At the end of Q1 2014, there were 1,116 PDHs
and 568 BTLs in lenders’ possession. Of the
PDHs, 281 were taken into possession during
the quarter, 54 of which were the result of a
court order, while 227 were abandoned or
voluntarily surrendered.

6. Top News Stories
The Central Bank of Ireland
has launched a consultation
into the sale of loan books.
The objective is to ensure that consumers with
mortgages that have been sold by a regulated
entity to a currently unregulated entity are
afforded the same regulatory protections they
had before the sale.
This includes whether their new mortgage
owner adheres to the Code of Conduct on
Mortgage Arrears. The proposed approach is
through legislation, but the Central Bank wants
to ask consumers and firms within the industry
whether this is the best approach.
The consultation will run until August 22nd.
Ireland’s growth is stronger
than expected.
This is according to the Central Bank of
Ireland’s Q3 2014 bulletin, which noted that
improving exports is a main driver behind the
unexpected momentum.
“Further growth in employment should
stimulate increases in household incomes and
consumer confidence and, with what has been
a lag, support modest growth in consumer
spending,” the Central Bank said.
It also commented on the banking sector,
where profitability is improving and funding
costs easing. However, banks still need to
progress the performance of impaired loans
“by placing them on a truly sustainable basis
wherever possible”.
The Central Bank wants lenders to increase
the pace of the conclusion of sustainable long-
term arrears arrangements.
Royal Bank of Scotland
(RBS) has been advised to
sell a majority stake in Ulster
Bank.
According to the Sunday Business Post, RBS
has been formerly advised by Morgan Stanley.
An announcement is expected wc 4 August and
could trigger a former bidding process, the
newspaper added.
RBS chief executive Ross McEwan recently
said the various business opportunities were
currently being assessed, and he could go into
more detail “in the next two or three months”.
Deutsche Bank has
purchased €400 million worth
of loans from the National
Asset Management Agency
(NAMA).
According to sources close to the deal (known
as Project Spring), Deutsche Bank has bought
the portfolio of loans linked to developer Gerry
Conlan for an unknown price.
The Project Spring sale follows the previous
announcement that NAMA made €211 million of
profit in 2013, while it completed its largest ever
loan sale transaction. The Portfolio Eagle deal
was concluded with Cerberus Capital
Management.

7. Top News Stories
Concerns have been raised
about interest-only
mortgages in Ireland.
A large number of these types of loans in the
country were taken out for BTL purposes
between 2005 and 2008.
New figures from the Central Bank show that
many of these mortgages will convert to full
repayment over the next two years, while 44%
of BTL interest-only borrowers will be into
retirement age when their loans change to full
repayment.
Despite this, the Central Bank noted that there
is an average of 14 years until this segment of
borrowers retire, so they have plenty of time to
put strategies in place to cover the higher
repayments.
The report noted: “Evidence suggests that the
switch from interest only to principal-and-
interest has tended to trigger arrears in the
past for these borrowers, with over-90 days
arrears rate much higher than for other BTL
borrowers.”
There is currently a discussion in HML’s
Interest-Only Mortgages group on LinkedIn
about the Central Bank’s report.
AIB has returned to
profitability.
AIB has posted its half-year results, which
show it has returned to profit for the first time
since it was bailed out.
It posted pre-tax profit of €437 million to 30
June 2014, a €1.3 billion improvement in
performance compared to the first half of 2013.
Since December 2013, total impaired loans
have fallen by 10% (€2.9 billion), while the
total number of accounts in arrears in its Irish
residential mortgage portfolio fell by 6% over
the first half of the year.
David Duffy, chief executive officer at
AIB, commented: “The group has
demonstrated its capacity to support economic
recovery with loan approvals, including the UK,
of c.€5.6 billion, up 33% year on year. Our
mortgage arrears and overall levels of impaired
loans are reducing and our performance in the
first half of the year saw a material reduction in
provision charges.
“As the Irish economy and the bank recovers,
we remain focused on growth and maximising
value for the Irish state, as 99.8% shareholder,
and all other stakeholders over time.”
It has also been announced that Richard Pym,
the chairman of the Co-operative Bank, will step
down from his role this year to join AIB as a
non-executive director and chairman-designate
from October.
Ireland’s GDP will increase
by 2.8% this year.
This is according to Bank of Ireland’s latest
outlook for the economy, which noted a 3.4%
GDP growth for 2015. In addition, a robust
export growth of 4% is expected for this year.
“The recovery path that we are witnessing is in
keeping with what we would expect for a small
open economy like Ireland. The starting point is
a rebound in exports, which leads to a pick-up
in investment. This supports employment
growth which in turn, and in time, underpins an
improvement in consumer spending,”
commented Bank of Ireland’s chief
economist Loretta O’Sullivan.