Paul Smee, director-general of the Council of Mortgage Lenders told the Treasury that LTV capping may not be the most effective way to encourage financial stability.
He said: “I would encourage the FCP to look at international studies over LTV caps. The results in other countries, including Hong Kong and Canada, are quite mixed due to unstable house prices.”
He added that the FCP need to consider government policies before taking action.
“It would be awkward if the FPC imposed higher LTV caps as that would go against government schemes such as FirstBuy and NewBuy, which cater to that market.”
The FSA ruled out LTV capping in its Mortgage Market Review draft proposals, however the Financial Services Bill, brought by the government to stave off a second credit crunch, contained a raft of new macro prudential proposals.
Andrew Browne, CEO of the British Bankers Association (BBA) said there is “no precise single indicator” to measure effectiveness of macro prudential tools.
The panel said the FCP should consider including a housing market indicator which would look at different sets of data collected on the market including house prices, earnings per ratio, income variations and amount of overall mortgage debt outstanding.
Adrian Coles, director-general of the Building Societies Association explained to the Treasury that purchasing property has become “much riskier” in the current environment because house price inflation is absent.
“No one wants to return to irresponsible lending decisions where mortgages were available up to 100% LTV. On other hand, the consequence is that young people have to come up with deposits of at least 20%. Some policy answers will be coming out of the Financial Services Authority’s Mortgage Market Review paper in the next week or two on this.”
The panel agreed that other tools, such as the ability to vary sectoral capital requirements, might be able to achieve some financial stability benefits.
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The panel were asked by the treasury whether interest-only mortgages are a ticking time-bomb. The CML’s Paul Smee rejected this claim insisting there are only a “small number” of interest-only deals.
“Lenders will be looking sympathetically at how they can help come to an arrangement. They are already in dialogues with borrowers as there is a regulatory requirement to contact borrowers during the life of the loan and many lenders are doing more by contacting borrowers at an early stage.”
The BBA’s Anthony Browne said he is aware of concerns about an interest-only mortgage timebomb and will work to prevent a fresh misselling scandal.
