New international banking regulations could push up the costs of residential and buy-to-let mortgages, the Council of Mortgage lenders has warned.
The trade body for the mortgage industry said that the Basel Committee on Banking Supervision’s proposals requiring lenders to increase capital requirements would have “unintended and negative consequences” for the residential and buy-to-let markets.
The CML said: “Proposed changes by international banking regulators to the rules for assessing credit risk do not reflect the real underlying risk of those assets and would result in unduly harsh capital treatment of both prime residential and buy-to-let mortgages.”
The Basel Committee on Banking Supervision has proposed that lenders should set aside more capital to cover buy-to-let mortgages as a buffer to limit risk.
The CML argued that the risk weighting increase was not justified by historic losses and that the proposals failed to make sufficient allowance for the way in which mortgage regulation had already been reinforced in the UK.
“In current market conditions, mortgage funding is available and attractively priced, and UK consumers are enjoying some of the lowest rates ever. But capital requirements that are excessive relative to the risk of the underlying assets are likely to affect the cost and availability of mortgages,” it said.
It also expressed concern about the committee’s proposals for the valuation of property.
“The BCBS is currently proposing that national supervisors should continue to be able to require lenders to adjust property valuations downwards. Once they have done so, values may subsequently be revised upwards again – but cannot be increased to a level exceeding the original valuation,” the CML said.
“We think this approach is flawed. In effect, it means that property values can go down, but not up. The obvious problem is that the valuation affects the loan-to-value ratio of a mortgage. So, being able to update this to reflect true market value of a property allows a lender to operate on the basis of a clearer understanding of the potential risk associated with the loan, and the loss given default,” it added.
John Heron, managing director of Paragon Mortgages, recently described the proposal to increase capital requirements on buy-to-let as “nonsense”.
“How could you have a capital requirement for a loan that has half the arrears of owner-occupied lending requiring twice as much capital or more? It just doesn’t make any sense at all,” said Heron.
“If we look at buy-to-let throughout history, except for one relatively small dip caused by one or two lenders during the financial crisis, buy-to-let arrears have been half the level of owner-occupation. The general credit profile has been significantly superior because you are dealing typically more mature individuals who require much lower loan-to-values and put more of their own capital in and retain the profits for long-term for investment,” he added.
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