JOINT COMMITTEE ON THE ENVIRONMENT, HERITAGE AND LOCAL GOVERNMENT díospóireacht -
Tuesday, 22 Sep 2009

Annual Report and Accounts 2008: Discussion with Housing Finance Agency.

Chairman

We are moving on to the main business of today's meeting, namely, the annual report and accounts for 2008 for the Housing Finance Agency. We welcome officials from the Housing Finance Agency plc to discuss its annual report and accounts and I thank the delegation for attending. We are joined by Mr. Ian d'Alton, chief executive officer and director of the agency, Mr. Barry O'Leary, head of treasury, Mr. Tom Conroy, financial controller and company secretary, and Mr. Philip Nugent, non-executive director and principal officer of housing policy in the Department of the Environment, Heritage and Local Government. The delegates are all welcome here today.

The format of the meeting will involve a brief presentation from the agency on its work, followed by a question and answer session. Before the presentation begins, I want to draw the attention of delegates to the fact that members of the committee have absolute privilege, but the same privilege does not apply to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I call on Mr. d'Alton to begin.

Mr. Ian d’Alton

It is very good of the committee to have invited us in. We are pleased to have been given an opportunity to outline the structure, functions and objectives of the agency and to present to the committee our annual report for 2008. We look forward to being able to answer any questions concerning the agency generally and to clarifying any specific issues the committee may raise.

I shall deal with the agency's function and mission first. Its function is to advance loan finance to local authorities and the voluntary housing sector to be used by them for any purposes authorised by the Housing Acts and to borrow or raise funds for these purposes. Our mission is to source and structure this loan finance in a cost-efficient manner and to the requirements of our customers. The agency does not formulate housing policy. That is the preserve of the Government.

The agency's role is to provide appropriate funding for the schemes and projects decided upon and established by the Government. We are required by the 1981 Act to meet the costs from our operations and this we do. The agency does not receive any Exchequer grant or subvention. Another important point is the agency does not lend directly to individuals or households. We are in effect a centralised borrower on behalf of local authorities. We block lend to the local authorities and then, in turn, lend at individual level, having added a margin to cover the administrative and risk costs in so doing. For our housing business, the Government guarantee on our borrowings enables us to raise funds at very fine rates. The total outstanding loan book of the agency at the end of July this year was €4.5 billion.

I shall now give a brief summary of the agency's establishment and structure. It was established in 1982 following the passage of the Housing Finance Agency Act 1981. That Act empowered the Minister for the Environment, as the role was known then, to form a company limited by shares. The agency has a share capital of €39,000, all of which is beneficially owned by the Minister for Finance. It is governed by a memorandum and articles of association, operates within the terms of the Companies Acts, is subject to normal company accounting rules and principles and is audited by a commercial firm of auditors.

The board of the agency is appointed by the Minister for the Environment, Heritage and Local Government with the consent of the Minister for Finance. The term of membership is generally no more than five years except for my own which runs for seven years from my date of appointment as chief executive officer to the conclusion of my current contract. Members will be aware that the chairman of the agency, Mr. Ted Coffey, died in office earlier this year. Mr. Coffey was appointed chairman in 2002 and reappointed in 2007. I am sure the committee will allow me to pay tribute here to his work on behalf of the agency, especially his skills in managing meetings efficiently and productively and his role in cementing the excellent working relationships we have with our customers, the local authorities.

The board consists of 12 members. The current board is representative of local authorities and the voluntary housing sector and includes among its membership a serving county manager and a head of finance. It also includes a senior official from the Department of Finance as well as the Department of the Environment, Heritage and Local Government. More details of our history, functions and reporting relationships are set out in our five-year rolling corporate plan, the latest edition of which is published on our website, www.hfa.ie.

I shall now deal with corporate governance. The directors are committed to maintaining the highest standards of corporate governance. The agency in its business follows corporate governance principles in relation to companies, otherwise known as the 2006 combined code, and complies with the code of practice for the governance of State bodies as published by the Department of Finance and revised in June this year. The board has established a performance review committee which evaluates its own performance and that of individual directors.

As regards the schemes funded, the agency was originally set up to operate a specific scheme of income related mortgage loans based on index-linked funding, primarily from pension and life funds. This scheme allowed 16,000 households, which would not otherwise have been able to do so, to acquire houses between 1982 and 1986. Some 500 of these loans are still outstanding. The agency's remit has been widened and deepened progressively since its foundation. In 1986 it was given responsibility for funding all house purchase loans, taking over this role from the local loans fund. Since 1992 it has funded the shared ownership scheme and the capital loan and subsidy scheme. The latter provides rental accommodation through voluntary housing bodies. In 2002 we were given powers to lend to local authorities for water, waste and environmental projects, about which I will deal later. In the Housing (Miscellaneous Provisions) Act 2009 the agency has been given the specific task of managing an affordable dwellings fund which will recycle capital repayments on affordable dwellings back into that market.

The agency categorises its business into two broad areas, namely, mortgage business, which accounted for about €1.6 billion at the end of August this year and 36% of our total, and non-mortgage business, which was about €2.9 billion at the end of August or 64% of the total. Of the mortgage related business 81% comprises variable rate annuity loans, 10% relates to older income related loans and shared ownership loans and 9% is fixed rate. In total these schemes lend to about 25,000 households. Non-mortgage business covers what are the wholesale aspects of housing by local authorities, such as support for the voluntary housing sector through the capital loan and subsidy scheme, land acquisition, bridging finance and projects ancillary to and supportive of housing.

Our business also includes a small but important amount of finance for projects in the water services, waste and environmental areas under the provision of the Housing (Miscellaneous Provisions) Act 2002. To conform to EU state aid rules, our borrowing in this area is not guaranteed by the State. The price of the debt we raise is thus somewhat higher than what we pay on our guaranteed borrowings. Nevertheless, by accessing block funds from the European Investment Bank and the Council of Europe Development Bank, individual projects deemed too small for direct borrowing have been able to benefit from the fine rates available from these large supranational organisations. The amount advanced so far is relatively small, about €50 million, although we see opportunities for expanding the programme in the future, subject to availability of finance and general Government borrowing constraints.

I am sure the committee will be interested to know how we set and manage our interest rates. The agency has adopted a policy that sets interest rates at the lowest level commensurate with its costs, thus effectively operating on a break-even basis. On mortgage related rates, interest rates are set to ensure the agency can meet costs from its operations. Regard is paid to the level of average rates generally in the market to prevent distortion. The current variable rate to the borrower, excluding mortgage protection insurance costs, is 2.25%. Historically that has been about 0.5% below the average comparable market rate and is currently about 0.9% below, offering a significant saving in the current economic climate.

Local authorities also offer a five-year fixed rate to new borrowers, which is currently 4.4% and below the market average of about 4.89%. It is equivalent to the mid-range of similar private sector products. The non-mortgage related variable interest rate is, for risk management purposes, closely tied to our ongoing cost of funds. We achieve this by setting the rate monthly in arrears once our costs are known for that month. The average rate for 2009 is likely to be about 2.3%, which, assuming no further change in rates, should equate to a saving for our customer over current average private sector finance rates of at least 1% or about €30 million per annum on our total non-mortgage book.

The agency funds its operations by borrowing on domestic and international capital markets. In funding housing related loans, all our borrowings are State guaranteed, as approved by the European Commission under state aid rules. Our borrowing limit was recently increased to €10 billion, which should be sufficient for the foreseeable future. Where possible, the agency matches funds to its borrowing and lending. As the vast bulk of our lending is at a variable rate, so too are our borrowings. The principal instrument we use to raise funds in this area is what is called a eurocommercial paper programme of €4.4 billion which attracts the highest short-term ratings from the rating agencies Moody's and Standard & Poor's. The programme is operated on a cost recovery basis at the dealing end for us by the National Treasury Management Agency under an agency agreement of 2003, pursuant to a provision in the Planning and Development (Amendment) Act 2002. While the agency sets the broad parameters within which the programme is operated on our behalf, it makes sense to run this large programme in tandem with the State's own similar debt programmes, thus achieving synergy in marketing Ireland paper as a unity. Other debt consists of fixed rate and index linked bonds totalling €287 million, a medium term bank loan of €250 million and domestic commercial paper, including an investment facility which is useful to local authorities when they have short-term surplus cash.

The agency's risk management policies are set out in its annual report and note 15, in particular. I draw the committee's attention to an important element of our financial risk since, in large part, it explains the reason the agency requires reserves to be built up. There is a long-standing mismatch in our index linked and older fixed rate books. This is a legacy of the old Irish pound regime of more than 20 years ago when it was not as easy to structure debt in as flexible a way as it is now. As a result, there is an overhang in index linked and fixed rate bonds over the matching loans to borrowers that will result in costs arising until 2018 when the last bond matures. The agency has had a policy for many years of building up reserves to cover these costs and the model we use was validated by an outside accountant in 2006. Our reserves at the end of July were just over €25 million. We have built these up while still delivering competitive rates to our customers.

The agency's staff comprises 14 persons which, with job sharing arrangements, equates to 12 whole-time equivalents. This number has remained unchanged since a review in 2002. Since then the number of loans dealt with has increased by 90% and the total loan book has increased from €2.4 billion to €4.5 billion. The agency's staff pay rates are linked to appropriate public service grades as approved by the Minister and we do not pay overtime, premium pay or bonuses. Salaries account for approximately 40% of total administration expenditure.

The annual administration budget for the agency accounts for approximately 0.04% of the total outstanding loan book as at 31 July. Most of our business is carried out through a dedicated custom-built members website which allows for loan advances and treasury dealing to be done on-line, involving the agency, the local authorities and the Department. The agency is a self-financing body, not in receipt of Exchequer funds. Due to its small core size, it outsources requirements such as IT maintenance and development, legal services and dealing on our eurocommercial paper programme. The agency is always aware of the necessity to keep its costs down; for those costs under our direct control we are aiming to achieve savings of approximately 10% in 2009 over 2008.

The agency made a loss of €2.02 million in 2008, compared to a loss of €6.5 million in the previous year. I emphasise that these losses were planned for and in line with our projections based on our long-term risk management scenario. For 2009 we expect, barring unforeseen circumstances, to make an overall profit of approximately €9 million, thus increasing reserves to approximately €30 million. These will be utilised to bear the portfolio mismatch and any other risk costs that might arise over the period to 2018. Activity in 2009 and beyond is likely to be much reduced over that seen in 2007 and 2008. In the latter years the agency made net advances of €707 million and €621 million, respectively. Average annual net advances since 2000 have been €379 million. This year and probably in subsequent years net advances are likely to be approximately €100 million to €150 million.

I hope this brief overview of the agency has given the Chairman and members of the committee a suitable background for the questions or comments they might have relating to the agency's activities.

Deputy Phil Hogan

I welcome the representatives of the Housing Finance Agency which has been a great source of revenue for local authorities to fund housing activities in the last 28 years. The fact that the agency is still standing, as it were, and has not been commented on in the McCarthy report is a good sign.

I have questions relating to the trends in borrowing for housing. The agency does not deal directly with clients as individual house purchasers but with local authorities. The anecdotal evidence from local authorities indicates there are difficulties in making repayments and that there are many more on housing lists. Does Mr. d'Alton have a view on where the agency could interact more proactively with local authorities to assist people in getting into the home ownership market? There are a number of proposals from the Government relating to home choice loans which do not appear to be working. There is another proposal called shared equity which is, perhaps, a revamped version of the shared ownership loan. Does Mr. d'Alton have a comment on the operation of or modifications required to that loan?

Second, has the agency any shareholdings in property? I have a recent interest in that matter. With so much money at its disposal, would the agency have entered into joint ventures? I am interested in the €50 million it is investing in infrastructure, particularly water and wastewater provision. There is likely to be additional take-up of that funding. Local authorities are generally up to the wire in achieving the objectives of water framework directives and so forth. Has the agency much interest in this and what are the terms and conditions attached to funding infrastructural projects apart from housing?

Mr. Ian d’Alton

I will answer the last two questions first and let my colleague who is a director and has responsibility for policy matters reply on the first matter.

We have no shareholdings in property. We have a great deal of money in computers but no shares in property.

With regard to the €50 million scheme for water and wastewater provision, there is substantial demand from local authorities for this infrastructure and the associated funding. We have made a speciality of accessing funds from the two supranational institutions I mentioned, which probably is very cost effective funding. Essentially, we pass these projects through the agency and break them down. Individually, the projects would be too small to attract direct funding from the EIB and the Council of Europe Development Bank. Parcelling them and channelling them through the HFA makes them viable from the point of view of these two banks. We essentially on-lend the funds with a very small administrative margin, sufficient to cover our costs. Commensurate with the general constraints on borrowing imposed by the Government in this area, we are in a position to fund if we are asked to do so.

Deputy Phil Hogan

It makes sense from the State's point of view to pay no fines to the European Commission in 2015. I am interested in how the agency can get off-balance sheet funding that does not conflict with the various criteria laid down by the European Commission regarding our borrowings. What terms and conditions would be attached? For example, if, to use the fashionable term, a bundle of 20 to 25 municipal wastewater treatment projects valued at €200 million or €300 million was put together, would the Housing Finance Agency, having received Government approval, be in a position to secure this funding from the two European banks to which Mr. d'Alton alluded? If so, what rate of interest and what type of schedule of repayments would apply? We have to think outside the box in terms of how we will fund projects if we are to avoid paying fines to the European Commission. How would the process work?

Mr. Ian d’Alton

My colleague, Mr. O'Leary, who has been dealing with the European Investment Bank and the Council of Europe Development Bank may wish to answer the Deputy's question.

Mr. Barry O’Leary

On terms and conditions, the Housing Finance Agency has tended to borrow variable rate money. The rate payable at present is the Euribor rate plus approximately 0.9%. The agency adds a modest margin of 0.2% to that figure to cover its own costs. If the Euribor rate is running at 0.5%, we could lend at 1.42%. We borrow variable rate money and tend to lend sums over ten or 20 year terms. Borrowers are free to repay as some of the income on the relevant activities comes in.

Deputy Phil Hogan

Mr. d'Alton indicated the banks would not lend to small projects. What order of funding would be of interest to the banks?

Mr. Ian d’Alton

From the point of view of the local authorities, current projects are——

Mr. Barry O’Leary

The value of current projects is somewhere between €10 million and €100 million. The European banks have indicated to us that they are not interested in approaches for loans below €100 million.

Deputy Phil Hogan

They would be interested in providing loans for projects that are bundled.

Mr. Ian d’Alton

Yes, that is the approach we take.

Deputy Phil Hogan

I referred to a policy matter.

Mr. Philip Nugent

As the Deputy indicated, the home choice scheme was introduced as a response to a perception that financial institutions were unwilling to lend to households which would previously have been regarded as creditworthy or were willing to lend only to loan to value ratios that would not be of much benefit to first-time buyers. In response to this perception, the Government introduced the home choice scheme last year. The scheme did not provide an incentive for people to enter the housing market but set out to facilitate house purchase for persons who, as a result of the credit crunch, found themselves unable to purchase. The level of interest in the scheme to date suggests there is more to the downturn in the housing market than availability of credit and that sentiment in the wider economy is probably more important than the availability of credit. Even with credit available——

Deputy Phil Hogan

Mr. Nugent will not have been kept busy processing just four applications submitted under the home choice scheme.

Mr. Philip Nugent

That is exactly what I am saying. Our experience has been that the issue is more than one of making credit available. There are broader issues of sentiment at play. Availability of credit is just one small aspect of the issue.

Deputy Phil Hogan

When will the equity scheme be in place?

Mr. Philip Nugent

As the Deputy will be aware, the relevant Act was passed on 15 July and will be commenced on a phased basis. I am not sure exactly when the new affordable dwelling purchase arrangements will come into force.

Deputy Ciarán Lynch

I seek clarification on an issue. The joint committee received correspondence referring to the launch by the Minister of State, Deputy Finneran, of a strategic report on voluntary and co-operative housing. Does the Housing Finance Agency have any involvement in leasing arrangements? Is it envisaged long-term housing leasing arrangements may be financed or operated through the agency?

Mr. Philip Nugent

The Deputy will be aware that section 17 of the 2002 Act includes a provision enabling the agency to lend directly to voluntary bodies. We envisage significant scope for approved housing bodies to become directly involved in leasing.

Deputy Ciarán Lynch

I am concerned about this matter given the NAMA legislation before the House. I am concerned, for instance, that all future policy on housing will first have to be NAMA-proofed. What I mean is that I fear the requirements of the toxic assets held by NAMA will take precedence over the requirements of the Housing Finance Agency in assisting people to purchase homes. There is real potential for that policy to change in the coming years if the agency becomes involved in leasing.

One of the reasons the Housing Finance Agency was established was the strong desire among Irish people to own a home. The Grant Thornton review which was noted earlier in correspondence calls for a cessation of mortgage funding for family type properties. May I interpret this as a call for the agency to move away from assisting people to purchase a home? The press release to which I refer also states Grant Thornton instead advises that better value for money can be achieved from assessing the current oversupply in the housing market by way of long-term leases or sourcing private finance from pension funds, investors, etc. The raison d’être of the agency is to serve the needs of prospective house buyers. I would be deeply concerned if it was to become involved in serving the needs of the toxic assets to be transferred to NAMA. The press release to which I refer indicates this is the direction in which the agency may move. Does the agency hold leasing stock or handle leasing money? It appears it does not handle leasing money but it has the potential to do so.

Mr. Ian d’Alton

We have the potential to lend money to voluntary bodies——

Deputy Ciarán Lynch

For leasing purposes.

Mr. Ian d’Alton

——to allow them to acquire properties to lease to the State.

Deputy Ciarán Lynch

Is the agency currently engaged in this activity?

Mr. Ian d’Alton

No.

Mr. Philip Nugent

To clarify a matter referred to in the press release, the reference to the cessation of the provision of family type accommodation refers to the cessation of the provision of such accommodation under the capital loan and subsidy scheme, CLSS, one of the funding streams by which approved housing bodies provide accommodation. The other funding stream is the capital allowance scheme, CAS, which tends to cater for special needs, single persons, older people and people with disabilities. The CLSS for family type accommodation has traditionally been a supplement to local authority mainstream social housing provision.

Housing provided by voluntary bodies cannot be bought out under tenant purchase arrangements. The press release does not indicate that the right of people to own will be somehow compromised. People cannot at any rate own under the capital loan and subsidy scheme.

Deputy Ciarán Lynch

My interpretation of the press release is that if the Housing Finance Agency extends its operations to include other means of home purchases, it will become involved in supporting leasing as opposed to purchasing arrangements.

On a second issue, those who purchase homes through local authorities experience delays in securing reductions in mortgage interest when the European Central Bank cuts interest rates. It appears to take forever and a day for local authorities to pass on ECB reductions. Why has this difficulty arisen? What is the average mortgage schedule for someone purchasing a property through local authority mortgage packages?

Mr. Ian d’Alton

I will address the Deputy's question on passing on changes to interest rates. For obvious reasons, the Housing Finance Agency is cautious and prudent as it operates as a break-even organisation. For this reason, we must take time to assess changes in interest rates to determine what is happening in the market and take a longer view to ensure changes may not be reversed. We fund off market rates rather than European Central Bank rates and the Deputy will be aware of the distinction between these rates. In all cases up to the most recent European Central Bank rate cut, we have followed the ECB and cut our rates. I emphasise, however, that not all private sector mortgage lenders have done this, which has meant that we have widened our margin from approximately 0.5% to close to 1% for borrowers. This figure refers to the difference between what is available to our borrowers and the average market rate. Essentially, we have to move cautiously and prudently. That is the reason we do what we do.

Deputy Ciarán Lynch

Is the agency borrowing at variable rates?

Mr. Ian d’Alton

Yes.

Deputy Ciarán Lynch

If the agency is borrowing at a variable rate, it is lending at a variable rate as well.

Mr. Ian d’Alton

Yes, correct.

Deputy Ciarán Lynch

For quite a significant period of time mortgage rates have been at an all time low.

Mr. Ian d’Alton

Yes.

Deputy Ciarán Lynch

Even in the present situation, while there is an indication that annual percentage rates are going to increase, there is nothing happening immediately in the next couple of weeks. I can understand Mr. d'Alton's caution on it in that he is dealing with taxpayers' money, but there seems to be an inordinate delay in his agency passing on those interest rate reductions to customers at the end of the line.

Mr. Ian d’Alton

I do not think I can accept that there is an inordinate delay. We move as we see fit but we have passed on all except the last cut to borrowers. We do it as quickly as we can commensurate with ensuring our accounts are in good order and in good shape. We have that responsibility and we take it seriously. Ultimately, however, the borrower is getting an extremely good rate of 2.25% at the moment. One would be hard pressed to get a standard variable rate better than that in the market at the moment.

Deputy Ciarán Lynch

What is the average schedule of mortgages? Is it 20, 25, 30 or 35 years?

Mr. Ian d’Alton

They are 30 years generally. They are standard variable mortgage packages. Most of them are for 30 years, but some of them are for 25 years depending on the kind of mortgage.

Deputy Ciarán Lynch

On an income-to-purchase value, what is the ratio the HFA operates under? Would it be four, six or eight times?

Mr. Philip Nugent

That is an issue for local authorities in dealing with applications for their mortgage lending. The maximum loan-to-value ratio is 92%, and that has been the maximum loan-to-value ratio since about 1987.

Deputy Michael Fitzpatrick

I recognise the valuable work the agency does, but it is self-financing so somebody — the borrower or the local authority — is financing it. I always thought the local authority service was free in this process. Having listened to Mr. d'Alton, however, it seems they also charge a fee to administer the scheme. Am I right in that?

Mr. Ian d’Alton

Yes, they do.

Deputy Michael Fitzpatrick

Does the agency charge a fee as well?

Mr. Ian d’Alton

That is a small part of it, just to pay our administrative costs.

Deputy Michael Fitzpatrick

At the end of the day, the borrower is paying for the cost of administration.

Mr. Ian d’Alton

Yes. It is similar to a bank which has to charge an administrative margin as well.

Deputy Michael Fitzpatrick

I hope that they are not that high.

Mr. Ian d’Alton

They are not that high, but a local authority has to cover its own costs for administering the loan plus some element to cover the risks involved in lending. That would apply in any mortgage business.

Deputy Michael Fitzpatrick

It may not be appropriate to ask the agency, but why does a client come to a local authority to seek funding to purchase a house? Is it because they are on such a low income that they need the council to fund them or must they be on the county council housing list to qualify for that type of funding?

Mr. Philip Nugent

When people come to a local authority seeking mortgage finance, the requirement is that they have evidence of two refusals from a financial institution. This goes back to 1987 also. Local authorities are the lenders of last resort, so there is a requirement on prospective applicants to at least have tried to obtain loan finance from two financial institutions — one bank and one building society.

Deputy Michael Fitzpatrick

I ask because the new home choice mortgage scheme does not appear to be going very well. Is there any reason for that? The new scheme was supposed to better facilitate potential house purchasers.

Mr. Philip Nugent

The two schemes are aimed at different borrower cohorts. It is absolutely right that uptake under home choice has been very low. As I said in my response to Deputy Hogan, that suggests to us there is more at play than just availability of credit, that people are looking at wider economic fundamentals before they enter the housing market, and that availability of credit is just a small issue.

Deputy Michael Fitzpatrick

Is the agency audited by the Comptroller and Auditor General?

Mr. Ian d’Alton

No. We are a company and are audited by a commercial firm of auditors, which is KPMG at the moment.

Deputy Michael Fitzpatrick

I see that, yes.

Mr. Ian d’Alton

We do not come under Government accounting rules. We come under company rules, so it is appropriate we are audited by a commercial firm of company auditors.

Deputy Christy O’Sullivan

I was interested in what Deputy Hogan said earlier about waste water treatment plants. There are problems in getting these water schemes up and running, including where I come from, whether they be waste water or public water supply facilities. When did the agency get involved in that and how did it come about? Was it something that just progressed from the fact that the agency is involved in housing and water is an important aspect of that?

I am interested in the figures for current results and prospects for 2009, which appear on the last page. There was a loss of €2.2 million in 2008 compared with a loss of €6.5 million in 2007. In 2009, we are talking about a profit of €9 million. Can Mr. d'Alton explain how that came about? I am interested in the projected profit of €9 million for this year.

Mr. Ian d’Alton

I will answer the Deputy's last point first. I must emphasise that the losses in 2007 and 2008 were predicted. We knew these were going to happen, and they did. The reason was that we had very expensive bonds on which we were paying interest, but the borrowers servicing those bonds had disappeared because most of them had prepaid their loans. As I said in my introductory statement, this results from the fact that the bonds were issued in an environment, in the early to middle 1980s, which was much less flexible for issuing bonds. One could not tailor them as easily to what might happen to the borrowers on the other side at that time, so we were left with that overhang of bonds. A major bond was redeemed in early 2008, which explains in large measure why the loss for 2008 was much less than in 2007. It was because that bond, that risk, that expensive overhang had vanished. There is a carry-through effect of that into 2009.

There has been lower inflation as well. I do not want to get too technical but some of the significant parts of our accounts are inflation-based. With deflation in the system this has made the remaining index-linked bonds less expensive and therefore less loss-making. Those are the principal reasons we are on course to make a profit in 2009. However, we recognise that when inflation picks up again, as it inevitably will, we will have risk in the book through 2015 to 2018 which will need to be paid for. We need those reserves to cover the risk that is in there.

On the water waste and environmental projects, there is a specific provision in the Housing (Miscellaneous Provisions) Act 2002, which gives the agency power to advance funds for capital purposes under any of the particular sanitary services and other Acts. It was quite a wide measure. When that Act was commenced, we set about seeing how we might be able to provide cost-efficient finance to local authorities under that scheme. EU state aid is an issue because of the way the Union sees water and waste being managed. We deemed it necessary, therefore, to try to borrow without a State guarantee and we were able to access funds from the two supranational banks at reasonably fine rates. We commenced and completed a pilot project in early 2008. We evaluated that together with the Departments of the Environment, Heritage and Local Government and Finance and we have approval to commence a further project in that area. We are in discussions to complete financing with the European Investment Bank on a tranche of funding for water services and the environment, which will cover landfill and so on.

Deputy Christy O’Sullivan

How far can the agency go? Are criteria set down to which it must adhere?

Mr. Ian d’Alton

We will be constrained by Government borrowing limits for local authorities in this area.

Mr. Philip Nugent

General government borrowing, GGB, is not my area but I understand departmental officials were before the committee in April to discuss GGB issues. The Government set a maximum limit on the local government contribution to the overall GGB this year. Similarly, more projects are coming to the Department for consideration than can be met from within the overall limit, and borrowing for the HFA for waste and water capital projects, as Mr. d'Alton said, counts for GGB purposes. They are subject to the same cap.

Deputy Christy O’Sullivan

How much is the cap?

Mr. Philip Nugent

The cap is €200 million.

Chairman

Is that the same as last year? Has the agency scope to increase it?

Mr. Philip Nugent

It is. GGB is not my area. I could arrange to give that information to the committee. The contribution of the local government sector to the GGB is impacted on by development contributions. They have a positive impact on the local government contribution. As development contribution inflow tapers off, borrowing is reduced.

Chairman

Is the HFA's borrowing factored into the local government figure or is it separate?

Mr. Philip Nugent

Local government borrowing from the HFA for waste or water purposes is included in the GGB limit.

Chairman

Do many local authorities borrow for some of those other purposes from the commercial banks or is it all done through the agency?

Mr. Ian d’Alton

I do not have direct knowledge about that. Having spoken to a number of local authorities, some probably have, but the funding is probably expensive and I am not sure about its availability currently.

Chairman

Has the agency provided for impaired loans in its accounts?

Mr. Barry O’Leary

No.

Chairman

That is fine. I would expect that with local authorities. Does the HFA lend funding to local authorities to pass on to voluntary housing associations, VHAs? Why does it go through local authorities and not directly to the VHAs?

Mr. Ian d’Alton

That is how it has been done up to now.

Chairman

All of us who served on local authorities approved advances of €10 million for VHA schemes and it was just an item on the agenda. Members wondered why, if they had no control over the money, it was being referred to them for approval.

Mr. Ian d’Alton

The arrangements originally put in place for the capital loan and subsidy scheme were built around local authorities, acting with voluntary bodies in this area. In future, it is likely that if the agency is lending to voluntary bodies, it will do so directly rather than through local authorities.

Chairman

Appendices I and II refer to balances outstanding for all local authorities. Do they include funding to voluntary organisations?

Mr. Ian d’Alton

Yes.

Chairman

How much is that?

Mr. Ian d’Alton

A little more than €1 billion is available for the capital loan and subsidy scheme.

Chairman

Is that for the voluntary housing sector?

Mr. Ian d’Alton

Yes.

Chairman

Will Mr. d'Alton send the committee a schedule in this regard? Appendix I outlines a figure for the balance outstanding for each local authority. I presume the agency can send the committee a list giving a breakdown of the amounts for the capital loan and subsidy scheme. It would be interesting to see which local authorities have done a lot or a little in this area.

Mr. Ian d’Alton

We can send a list.

Chairman

When it comes to dealing with the VHAs, does the agency conduct financial stress testing or is it assumed they are all fine? Once it goes through the local authority, is that it?

Mr. Ian d’Alton

Currently, we do not have to because our legal lending is to the local authority. It is a relationship then between the local authority and the voluntary body, which would be an issue for stress testing. Where we lend directly to voluntary bodies in the future, we will have to put in place the appropriate due diligence.

Chairman

One VHA bought sites with the intention of building and when times were good, it sold them on. The association became a site speculator. Some VHAs might have sites but I do not know the loan to value ratio. Who knows that? I doubt there is competence within local authorities to assess that. I am aware of cases where VHAs turned a profit on a site. The VHA might have bought a site for 200 houses and then decided two years later in the good times to sell it on at a profit without proceeding with the development. What mechanisms are in place to address that?

Mr. Ian d’Alton

In the past we have not had to deal with that because our lending relationship was directly with the local authority.

Chairman

I am concerned about that because I suspect local authorities did not get into this either and some VHAs were turning over sites, etc. Who was keeping an eye on this?

Mr. Philip Nugent

That is a matter for the Department rather than the HFA but I am not in a position to provide clarity. However, I can take this back to the Department and talk to the relevant officials and liaise directly with the——

Chairman

If possible. My question relates to sites sold by VHAs without developing them. When they approached the local authorities for loans through the HFA for the purchase of a site, sometimes the developments did not happen. Perhaps they did not happen because local people objected to the planning process. There could be a variety of reasons but I would like to know how many sites were sold on and how many are still undeveloped. They must be somewhere in the system.

I refer to a case under the ownership schemes. A home owner under the scheme who took out a loan even at the variable rate could not change to the fixed rate or vice versa for five years. Will Mr. Nugent outline the rigidity applying to home owners under these schemes?

Mr. Philip Nugent

Most borrowing is at the standard variable rate. A five-year fixed rate is also available to provide a guarantee for buyers who typically are on low to medium incomes in order that they know exactly what they will pay for five years. The Department issued a circular to local authorities recently stating they should allow five-year fixed mortgages to be redeemed early or converted to the variable rate but the cost of funds to the local authority would have to be paid. In other words, there would be a breakage charge to cover its cost of funds.

Chairman

Is that a new initiative? It was not in place 12 months ago.

Mr. Philip Nugent

Yes, the circular issued in July.

Chairman

We have seen a copy. The breakage costs frightened us at the last meeting of the committee. We have all given out about the charges being imposed by the banks. It appears a typical loan would attract a charge of €14,000. We were shown how to work out the examples. The agency seems to be charging roughly the same amount as the banks to break a fixed-rate mortgage. That probably reflects the financial reality. While that facility is available, there is a significant cost associated with it.

Deputy Michael Fitzpatrick

If a client defaults on his or her payment, is it a matter for the local authority, rather than the agency, to recover it? Is the agency's only contact with the local authority? I assume it does nothing from that point on. If a client defaults entirely, is the local authority at a loss? Who loses out in such circumstances?

Mr. Ian d’Alton

The local authority receives a margin on all the loans it issues to borrowers. As I said, it is supposed to cover ongoing administration costs and the potential costs that might arise from defaults. It is a matter for the local authority, rather than the agency, to handle this.

Chairman

Do the representatives of the agency know if many evictions have been carried out by local authorities through finance provided under this system? I understand it has happened in recent years.

Mr. Ian d’Alton

I do not have that number.

Mr. Philip Nugent

Not many evictions have been carried out by local authorities in recent years.

Chairman

Can Mr. Nugent give us a figure?

Mr. Philip Nugent

A parliamentary question on this issue was asked during the last Dáil session.

Chairman

That was when I became aware of the issue.

Mr. Philip Nugent

I can provide a copy of the reply for the committee.

Chairman

I was surprised to learn that in recent years local authorities had carried out more evictions than the major commercial banks.

Mr. Philip Nugent

Information on the amount of money repaid to local authorities each year, as a percentage of the total amount due, is published in one of the financial tables in the local authority service indicators report.

Chairman

To which report does Mr. Nugent refer?

Mr. Philip Nugent

It is published each year by the Local Government Management Services Board. It contains details of all sorts of local authority performance indicators. The amount of money collected, as a percentage of the total amount due, is one of the financial performance indicators.

Chairman

Does the agency have any information on local authority housing funds spent on accommodation for Travellers? Does it deal with such matters? Do the local authorities submit such information to the agency in the normal course of events?

Mr. Ian d’Alton

We have no such loans out.

Chairman

Is it dealt with as part of the normal mortgage funding?

Mr. Philip Nugent

It tends to be directly funded.

Chairman

It is funded from a direct grant from the Department.

Mr. Ian d’Alton

That is correct.

Chairman

It is a direct grant from the Department. We have covered all the questions we intended to ask. We are pleased that the representatives of the agency were able to attend the meeting. We had a look at the accounts before they came in. I thank Mr. d'Alton and his colleagues for attending and making an interesting and informative presentation.

The joint committee adjourned at 5.05 p.m. until 2 p.m. on Wednesday, 30 September 2009.