Q: Do you think the new Mortgage Market Review (MMR) rules will stifle lending in a fragile economy? What impact will the new rules have on the wider economy?
A: Are you spending more on pet food, does your other half plan to join a golf club this year, and exactly how pricey was your last haircut?
These are just some of the questions we’ve seen newspapers report as part of the new Mortgage Market Review.
Putting the headlines aside, the real question to be discussed is whether the introduction of the MMR will stifle the recovery in lending?
Unlikely. Why? Because the industry has been applying the core of the MMR for the last 12 to 18 months, precisely the period in which the housing market has undergone resurgence. Lenders such as RBS/Natwest have been applying a stressed rate test, both for homebuyers and prospective landlords, for the last five years.
So, where’s the real change? As I pointed out in my last post, all eyes should be on Threadneedle Street in London.
While the MMR affordability tests, in particular the stressed interest rate test, are not new; the Financial Policy Committee and its ability to vary this stressed rate (should it choose to), is. It’s a kind of interest rate rise via the back door, designed to take the heat out of the housing market.
But what about the wider economic impacts? Well in the short-term, a cooling housing market is associated with weaker growth in consumer spending and house building. So any move to dampen housing demand via the MMR is likely to slow the pace of the economy’s recovery a little.
But, it’s the longer-term effects of the MMR which we should watch for.
The example of Hong Kong demonstrates how more robust underwriting standards can have a dramatic impact on both borrower and lender resilience to a housing bust. It used a combination of loan-to-value caps and debt-service-ratio tests. From 1997 to 2004 prices fell 65% and the 90-day delinquency rate never exceeded 1.5% of all mortgages.
In the UK at the start of the 1990s prices fell by 13% resulting in an estimated peak 90-day delinquency rate of around 6%.
The longer term challenge is that absent greater housing supply (and hence better affordability) and more robust lending standards may have distributional consequences.
There is a possibility that the MMR may serve to lock in or possibly exacerbate a set of trends in the housing market that are already there – falling homeownership rates, increased average age of first-time buyers and an increasing prevalence of buy-to-let lending in total lending. Time will tell, but certainly resolving some of these will go well beyond the scope of the mortgage industry alone.
