I sense a degree of nervousness from the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) around what it might see, as a slow and steady move up the risk curve from lenders in certain product areas.
This is not a race to the top (or bottom) but perhaps something of a risk ‘creep’ especially given how regulation and political intervention has reshaped a number of mortgage sectors.
Look elsewhere for margin
Undoubtedly, as has been much discussed, the significant drop in buy-to-let activity is ‘forcing’ a number of lenders to look elsewhere for their margin.
So perhaps there might be a suspicion from the regulator(s) that they are looking for it a bit too vigorously in some areas.
No specific lender, or sector, has been mentioned but one can’t help wondering whether it has its eyes trained on areas such as higher loan-to-value (LTV) loans for first-time buyers, later life lending, equity release, and the like.
Of course, we already have in place a number of measures designed to stop lenders from filling their books with, what the regulator perceives to be, riskier business.
The PRA’s rules around loans of above 4.5 times loan-to-income (LTI) not making up more than 15% of a lender’s overall new mortgage book are the most prominent of these.
To my mind, this seems like an incredibly basic measure and one that does not truly reflect the complexity of the mortgage market, how lenders approach it, and the rather more involved needs of the average mortgage customer.
I think most market stakeholders would say the market has moved a long way forward from the multiple times income approach to lending; indeed, the FCA’s own focus on affordability via the Mortgage Market Review (MMR) demanded a much more credible approach to be taken.
It’s within those realms that lenders currently work, and I suspect there will not be a lender in the land that isn’t all over its own risk profile, with a particular focus on affordability, stress testing, regional variations, customer segmentation, to name but a few.
This is not an industry looking at a customer’s gross income, applying the income multiple and saying: “That’s what you can get”.
The other point of course that should not be forgotten is around the nature of credit risk itself, and if the regulators do feel lenders are straying a little close to the cliff edge, they can lasso and tether them away from this by insisting they use a notable credit risk mitigant.
In the area of high LTV loans, private mortgage insurance has been used for many years by many lenders – particularly building societies – to do just that, ensuring that the lender insures itself against a loan or borrower not turning out how they anticipated.
Although work that goes into approving borrowers for loans, and the lenders’ understanding of their customers, is now far in advance of what was happening pre-credit crunch.
But even a decade on, the credit crunch and subsequent recession seems very fresh in the mind and there will be those working within the regulators who will not be willing to see anything similar happening on their watch.
That is a positive, but at the same time, we need to recognise how the mortgage market has changed, and how it has been changed, with many of the most high-risk product areas – such as self-cert or sub-prime – now completely off limits.
In that sense, much positive work has been done however we don’t want to throw the borrower baby out with the bath water.