The Council of Mortgage Lenders has submitted responses to two consultations that it says could ultimately have significant long-term effects on the UK mortgage 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 Bank of England’s Financial Policy Committee.
If granted as expected, these would enable the FPC to impose limits on loan-to-value ratios and income cover ratios on buy-to-let lending.
The CML director general Paul Smee said there were some common themes in the thrust of both responses, in particular 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,” he added.
On the Basel standardised risk weightings, although the new consultation addresses some of the CML’s earlier concerns, it argued the plans 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, stated the CML, calling for more differentiation to accurately reflect the level of underlying risk against different tranches of lending.
Main points to the Basel committee:
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 per cent loan-to-value would attract a risk weight of 90 per cent. 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 per cent, but the CML could find no 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 per cent LTV is not much riskier than a 79 per cent one, but under the proposals the latter carries a risk weight of 35 per cent, while the former carries a risk weight of 45 per cent on the whole loan, not just the portion above 80 per cent.
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.
In terms of the Treasury’s consultation, the CML’s response noted that although all lending activity carries with it inherent risks, buy-to-let is in aggregate no more risky an asset class than prime residential.