FPC urged to be flexible on LTV and LTI caps

Speaking at the Mansion House Bankers and Merchants Dinner in London last night the Chancellor said the FPC will have new directive powers over loan-to-income and loan-to-value ratios, essentially meaning it could limit the proportion of high LTI and LTV loans that banks can make or place a strict cap on the ratios.

Osborne said: “Housing is a long term problem – and our economic plan will provide long term answers.

“First, we have to be clear-eyed about where the risks to economic stability lie today. The risks come when people borrow too much to pay for rising house prices.

“In excess, that debt can cause serious difficulties for them and the banks who lent to them. And it can cause difficulties for the economy as a whole if an overhang of debt suppresses consumer spending...

“If London prices were to continue growing at these rates that would be too fast for comfort. And the rate of price rises is now beginning to spread beyond London. Across the country, the ratio of house prices to incomes is high by historical standards.

“And while average loan to value ratios for new lending are still well below normal, average loan to income ratios have risen to new highs.

“Let me spell it out: does the housing market pose an immediate threat to financial stability today? No, it doesn’t.

“Could it in the future? Yes, it could, especially if we don’t learn the lessons of the past...

“The FPC already have further tools in their armoury. But today we go further. I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market...

“So today, I am giving the Bank new powers over mortgages including over the size of mortgage loans as a share of family incomes or the value of the house.

“In other words, if the Bank of England thinks some borrowers are being offered excessive amounts of debt, they can limit the proportion of high loan to income mortgages each bank can lend, or even ban all new lending above a specific loan to income ratio.

“And if they really think a dangerous housing bubble is developing, they will be able to impose similar caps on loan to value ratios – as they do in places like Hong Kong...

“I say today, very clearly: the Bank of England should not hesitate to use these new powers if they think it necessary to protect financial stability.

“And I commit that while the Bank and the Treasury will need to design how these powers will work in detail, and will want to consult on them, I will make sure that they are legislated for and in place before the end of the Parliament.

“And I also commit today that if the Bank does act in future to limit mortgage lending then the same rules will be applied to every single Help to Buy mortgage.”

Commenting, Simon Crone, vice president – mortgage insurance Europe for Genworth, said: “Loan to value caps on their own, without any degree of flexibility, are blunt tools which risk excluding credit worthy borrowers.

“If the Bank of England is given the power to introduce them in future then before putting this theory into practice, the Chancellor and the Bank should consider the effectiveness of combining LTV caps with the flexibility to exceed the cap for credit worthy borrowers where an additional guarantee, such as mortgage insurance, is in place.

“This combination has worked well internationally in other markets, providing a more effective, sensitive and targeted macro prudential tool. In fact, legislation is currently before Parliament in Finland which specifically recognises the value of mortgage insurance and other credit risk mitigation tools by allowing the LTV cap to be exceeded when such tools are used.

“It’s critical to ensure responsible mortgage lending isn’t snuffed out by concern over rising house prices predominantly in and around London, which is its own unique market and bares little relation to the rest of the country.

“Activity already appears to be cooling as a result of new affordability checks imposed by the Mortgage Market Review. It suggests the case for an LTV cap may already be receding, but should the Bank decide to act further down the line, flexibility will be needed to avoid disadvantaging first-time buyers nationwide and once more widening the gap between the property haves and have-nots.

“There is nothing fundamentally wrong with getting a loan with a 5% deposit, providing you can afford the mortgage repayments. Past generations have relied on this and new affordability measures – only introduced in April – are now in place across the market so that no borrower can get a 95% LTV mortgage – or indeed any mortgage – without being able to afford it in the long term.”

Paul Winter, chief executive, Ipswich Building Society, agrees: “These new powers need to be used proportionately and carefully.

“State interference in the mortgage market can have significant and unforeseeable consequences. While nobody wants to see a return to the excesses of 2006-2007, government has stoked this housing bubble through a cocktail of subsidised credit in the form of Help To Buy (aimed at increasing the number high loan-to-value mortgages) and a failure to address the supply-side and build homes.

“We would not agree with denying individuals the opportunity to obtain a high loan-to-value mortgage as long as it is affordable, which is why we manually underwrite all of our mortgages... on a case-by-case basis.”