Under new proposals laid out by the Basel Committee, lenders could be required to hold more capital against higher loan-to-values (LTVs), which would see institutions forced to hold up to 100% capital for higher LTV loans.
The CML has raised concerns that some lenders could be forced to withdraw from these markets completely as the rules could unfairly penalise the specialist lending and social housing market.
Currently a universal risk weighting is applied to mortgages with an LTV ratio lower than 80%, obligating lenders to hold 35% capital against these assets.
For borrowers with debt service coverage (the proportion of borrowers’ income consumed by debt obligations) of 35% of lower, banks would be compelled to hold 25% capital for loans with an LTV of 40%, on a sliding scale of up to 80% capital for 100% LTV loans. However, where borrowers carried a higher burden of debt, lenders would need to hold higher capital to balance the risk.
The CML raised concerns that should the Basel Committee’s proposals come into force, lenders would have to hold three times as much capital against mortgages than previously required, meaning many institutions would be loath to lend to riskier borrowers such as first-time buyers.
“The proposals are also likely to raise capital requirements for all lenders, which will raise the cost and limit the supply of mortgages. This will have consequences for lending in specific areas of the market, with first-time buyer loans in particular becoming scarcer and more expensive – at a time when it is already difficult for people to get into the housing market,” the CML said.
It also warned that assessing risk on the basis of both LTV and Debt Service Coverage (DSC) ratios did not take into account how the specialist lending sector currently assessed applicants.
“One of the main problems with the Basel proposals is that they do not acknowledge the special characteristics of buy-to-let lending. Buy-to-let loans are instead potentially captured under a broader heading of ‘specialist lending.’ That could mean that the risk weighting on buy-to-let lending rises from its current level of 35% to 120%.”
The CML added that the absence of social housing as an asset in the Basel proposals could see it being classified as specialist lending and result in attracting a risk weighting of 120%.
“For the funding of both buy-to-let and social housing, such an increase in risk weighting is unjustified, particularly when taking into account lenders’ experience of low levels of default with both types of lending.
“Imposing a higher-risk weighting would have extremely serious consequences for both sectors. It would increase costs for borrowers – whether they are housing associations or buy-to-let investors – as firms are forced to cover higher capital costs. Some lenders may even choose to withdraw from these markets altogether, given the costs involved.”
