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CML responses on FPC powers and Basel urge evidence-based approach

Published: 11 March 2016

The Council of Mortgage Lenders has today submitted responses to two consultations that could ultimately have significant long-term effects on the UK mortgage and housing markets.

The first response is to the Basel Committee on revisions to the standardised approach for credit risk, which sets out proposals to change the risk weighting of mortgage assets. This will eventually determine how much capital lenders have to set aside against different types of lending. 

The second response is to HM Treasury on buy-to-let powers of direction for the Financial Policy Committee of the Bank of England. If granted as expected, these would enable the FPC to impose limits on loan-to-value ratios and income cover ratios (the rent relative to the mortgage cost) on buy-to-let lending.

Commenting on the responses, CML director general Paul Smee said:

There are some common themes in the thrust of our responses to the Basel Committee and HM Treasury. In particular, we are concerned that an instinctively negative view of the risk posed by buy-to-let lending compared to home-owner lending appears to underpin the proposals. This does not sit easily with the evidence base, which suggests that much buy-to-let lending is undertaken at moderate loan-to-value ratios, and compares favourably with home-owner lending. We would expect regulatory intervention to be sufficiently nuanced to differentiate the risks both across and within the various parts of the mortgage market.

On the Basel standardised risk weightings, although the new consultation addresses some of the CML's earlier concerns, the proposals nevertheless remain too blunt for a market as well regulated as the UK's. If adopted as drafted, this could have an unduly harsh effect on buy-to-let lending by lenders on the standardised approach. The CML believes more differentiation is needed to reflect more accurately the level of underlying risk against different tranches of lending.

The main points of the CML response to the Basel committee are:

  • The proposed risk weights seem ultra-conservative relative to the actual loss experience of mortgage lending historically. For example, a buy-to-let loan of 60-80% loan-to-value would attract a risk weight of 90%. That would suggest that such loans were more than two and a half times more risky than prime residential loans with a risk weight of 35%, but we can find no factual evidence to support this.
  • This problem is exacerbated by adopting a "slab" structure rather than a marginal, tranched one, which would be far better. (For example, a loan of 81% loan-to-value is not much riskier than a 79% one, but under the proposals the 79% loan carries a risk weight of 35%, while the 81% loan carries a risk weight of 45% on the whole loan, not just the portion above 80%)
  • The proposals seem disconnected from economic realities - for example, they allow regulators to require a revaluation on property to reflect the fact that prices may fall, but not to allow upward revaluation if prices rise.

The main points of the CML response to HM Treasury are:

  • While the CML supports the rationale for the new FPC powers, it is crucial that they should only ever be used with great sensitivity.
  • While the private rented sector is growing, buy-to-let lending funds only a third of properties within it, and accounts for only a fifth of the flow of new mortgage lending - even before the tax changes that will affect landlords take effect. While buy-to-let is a significant portion of the market, its overall influence should also not be overestimated.
  • Buy-to-let borrowers have diverse characteristics, and lenders adopt risk management strategies that reflect differentiation in the market. Regulation needs to be sensitive to the risk of affecting some market segments disproportionately.
  • The risk and loss metrics that feature in the consultation paper are not fit for purpose on buy-to-let as they incorporate other lending. The CML fully supports the development of better buy-to-let reporting and metrics and is working with the Bank to achieve this.

Notes to editors

1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 95% of all residential mortgage lending in the UK. There are 11.1 million mortgages in the UK, with loans worth over £1.3 trillion.

2. The CML's response to the Basel Committee on revisions to the standardised approach for credit risk, and the CML's  response to the HM Treasury on buy-to-let powers of direction for the Financial Policy Committee of the Bank of England are available on the CML website.

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