The mechanics here will allow the future stream of income, which will arise on the foot of mortgages which go to the local authorities and are transferred to the local loans fund, to be guaranteed into this special purpose vehicle for which bonds have been issued.
I have an old SDA loan and I recently received a letter from Kildare County Council. I disclose this by way of yet another nod in the direction of openness, transparency and accountability.
I am surprised the Deputy has not redeemed it.
I should, but it is the princely sum of £44.88 per month that I will pay for 30 years. I may take the Minister's advice, as I had more or less forgotten about it.
The question is, Deputy, would you run the country's finances better than your own?
That is the question. Are we guaranteeing this stream of income to the SPV? Local authorities would not have many dealings with this.
They would have little or none. The local authority relationship is to the local loans fund. This remains the same. However, the stream of income is being assigned to the SPV, and the relationship, for example, of the Deputy as a mortgage holder is still with Kildare County Council. Since the Deputy volunteered the example, let us assume that this stream of income is now to be assigned to one of the new bond holders. The bond holder only owns the assignment of the stream of income, not the title deeds of the property which the local authority would hold until such time as the Deputy had completed the full payments.
The difference between the provisions of the Bill and the normal commercial truncations — for example, in the normal sending of a mortgage book by a private company such as a building society or whatever — is that under the commercial transactions, books full of individual loans are identified.
Yes.
The relationship would still be with the building society or other institution, but the individuals' loans are identified. However, under the provisions of the Bill, the bond holders cannot lose at all. I am not arguing with the Minister for adopting this approach, because nobody would take up the bonds if this was not the case. However, it is somewhat different from a normal commercial securitisation, in that in so far as the bond holder is concerned, theoretically a book of individual loans will be identified, but regardless of whether the mortgagee or holder defaults, the bond holder will get his guarantee, in addition to the SPV, which will get the money that should have been paid into it.
Much of the Bill, therefore, consists of enabling sections to allow the principle to be followed through, even though it is really a guaranteeing by the State that the bond holders and the SPV will be paid, come hell or high water. I have no disagreement with the Minister in taking this route, but it is somewhat different from a normal securitisation. This is done more frequently in the USA than anywhere else. Am I correct in making these assumptions?
Broadly speaking, the Deputy is correct. This is at one step further removed. The Housing (Miscellaneous Provisions) Act, 1992, gave the local authorities power to assign all or some, or to sell or transfer mortgages which they own. We are including, by way of addition in subsection (1), a provision whereby the assignment will be equitable. They assign, as a form of property, the flow of income, but not the entitlements of the mortgage deeds that relate to this flow of income, so that the relationship between the SPV and the bond holder is underwritten by a guarantee on the equitable assignment of the flow of income, but they have no legal relationship to the mortgager, This is still retained.
Do subsequent sections guarantee any shortfall that may arise? The original purpose of section 3 as it stands would be as in the normal securitisation, but the sections that follow are not relevant because it is guaranteeing it in any event. I am sure this is what was advised by the experts.
The primary purpose of section 3, especially subsection (1) is to provide for this new equitable assignment. It is a new form of property.
Has any thought been given to future local authority loans? Some thought should be given to allowing private sector agencies provide loans which would be secured by the State. This would avoid the national debt being artificially increased.
No thought has been given to that suggestion. During private session, a question was posed as to why we are taking this route instead of availing of the Housing Finance Agency. There are good arguments for going one way or the other. I am anxious to create an outlet in the Irish capital market for securitisation of mortgages. There are two advantages in doing this. The managers of a great deal of institutional money such as pension and life assurance funds would be anxious to purchase loan books through securitisation of loans. This would meet their requirements because such loans are asset backed, are a flow of income and are secure. It would enable building societies to raise additional capital. This is one of the reasons for providing for securitisation in this manner; there were other choices.
State guarantee might be an easier and less expensive way of making capital available to local authorities to purchase houses. It must be asked whether a State guarantee of a fund of capital is tantamount to State borrowing and whether this would bring us back on to the merry-go-round of State borrowing being the equivalent of borrowing money in the capital market.
This involves something different. The State borrows to pass money on to other borrowers. This adds to the notional total deficit and incurs administrative costs at local authority level. Historically there is a certain percentage of default which can be quantified. The Minister is asking the Exchequer to take on that risk. This is a much more sensible way of dealing with this matter than the way we are dealing with it at the moment and this is the issue raised by the Bill. We are now disposing of £200 million of these loans and if we do not change our practices the loans will start mounting again in succeeding years.
There have been no SDA loans since 1986. Housing Finance Agency loans are different. SDA loans will run out in time.
This matter is complex but it is also simple at one level. The following example will illustrate this. It is as if we had a pension entitlement for the next 20 years some of which is paid each year and which has a capitalised value of £440 million. This is the value of the loans in question; there has been a £60 million redemption. In essence, what we are doing with these loans is equivalent to us seeking in the form of one payment from a bank or institution the total of the pension payments we would receive over the next 20 years.
