The Bank of England is watching lenders "like a hawk" amid the current mortgage price war and could impose stricter requirements over the capital they hold, according to the bank’s top banking supervisor.
Speaking at the Building Societies Association on Friday (May 24), Sam Woods, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, said the price war in the mortgage market had led to lenders exposing themselves to more risk in their lending practices.
This included ever-increasing amounts of high loan to value and loan to income mortgages alongside a fall in the capital lenders were holding to mitigate against the extra risk these products bring to their loan books.
In fact, the levels of capital held by lenders who use their own in-house models to work out how much risk a loan poses and in turn, how much capital they should hold, have dropped by a third over the past decade, according to BoE data.
The financial crisis was aggravated by high loan to value and loan to income mortgages and the industry saw a drop in the level of such products available post 2008.
But according to BoE data, the amount of lending offered on high LTV mortgages has started to increase with the rise of 90 and 95 per cent LTV products.
Mr Woods said this trend had been driven by rising house prices and the likelihood of defaults dropping, and although both these factors were real, he stressed the regulators should approach this with "a very sceptical eye".
He went on to say the PRA would consider whether there was a case to impose stricter requirements on firms to hold more capital to mitigate the trend.
Mr Woods concluded: "We, together with many others, have done a huge amount to make the financial system safer over the last 10 years.
"But the lesson of financial history is that unless we are absolutely vigilant, and keep questioning both firms and ourselves about evolving and emerging developments in the markets we oversee, then this safety can easily slip through our hands."
Last week, the so called 'price war' led Tesco Bank to announce it had ceased new mortgage lending and was actively looking to sell its existing £3.7bn portfolio of 23,000 mortgages.
Chief executive of the bank, Gerry Mallon, said the decision to pull the plug on its mortgage lending arm was down to "challenging market conditions" which had left it with "limited profitable growth opportunities".
Nationwide Building Society also reported a fall in profit alongside a narrowing of its net interest margin which the society stated reflected "conscious pricing decisions and competition for lending".
What do you think about the issues raised by this story? Email us on firstname.lastname@example.org to let us know.