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Basel III: A bitter pill to swallow – IMLA

by: Peter Williams
  • 17/06/2015
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Basel III: A bitter pill to swallow – IMLA
The Mortgage Credit Directive (MCD) is fast replacing the Mortgage Market Review (MMR) as this year’s regulatory controversy. But Basel III requirements also loom on the horizon, and their detrimental impact on high loan-to-value (LTV) mortgages could prove another pill hard to swallow.

Lender appetite for business continues to grow in the wider market with a plethora of products currently on offer at record-low mortgage rates. This momentum, however, has not been extended to high LTV borrowers.

IMLA’s 2015 New Normal report showed the marginal cost of ‘extra’ borrowing at 95% LTV, compared with 90% LTV, reached a staggering 30%+ by end of 2014. The situation has improved this year as 95% LTV borrowing costs have fallen, but the threat further regulatory intervention means this could be a temporary respite.

The worst case scenario is that Basel III will weigh down too heavily on first-time buyer activity and lenders will severely restrict lending to high LTV borrowers. Moreover, the wider impact of financial reform on lenders’ operating costs is to reduce activity and thus in turn supress the macro economy; a prediction shared by the IMF, OECD and the IIF.

As far back as 2011, the OECD concluded that “the estimated medium-term impact of Basel III implementation on GDP growth is in the range of (negative) -0.05 to -0.15 percentage point per annum”.

As with the MCD, we must hope to see the government mount resistance. One mortgage market option IMLA has championed is to progress a permanent private or state-backed mortgage guarantee in the mould of Help to Buy 2 to help lenders counteract these pressures. But the bigger question is how long we can realistically survive on a diet of state supplements to help us stomach the frequent regulatory pills?

Peter Williams, Executive Director of IMLA

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