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Is the Bank of England overstepping the regulatory mark on LTVs?

Brokers have warned of regulatory ‘mission creep’ after the Bank of England’s Financial Policy Committee urged Chancellor George Osborne to grant it additional powers with regard to financial stability risks in the housing market.

Having already introduced a cap on high loan-to-income lending on 1 October, the FPC now wants the power to impose a limit on loan-to-value ratios across residential lending as well as the buy-to-let sector.

The FPC has not specified a limit it wants to impose but has requested the power in the event of future risks emerging in the housing market.

The announcement shocked brokers, who have widely criticised the Bank of England since the announcement of the LTI cap in June, claiming policymakers are giving mixed messages around mortgage regulation following the implementation of the Mortgage Market Review in April.

Bank governor Mark Carney (pictured) also wrote to Osborne to give his stamp of approval for the Help to Buy mortgage guarantee scheme – one year after its launch.

In his letter to the Chancellor, Carney said high LTV lending volumes “remain small relative to experience before the financial crisis: high LTV loans, including Help to Buy, have accounted for 9 per cent of new mortgages in the year to date compared with roughly 25 per cent in 2007. The FPC assesses that the scheme does not pose material risks to financial stability.”

Chadney Bulgin mortgage partner Jonathan Clark says while the mortgage industry is braced for regulation of the buy-to-let -market following the Treasury’s recent consultation on the EU mortgage directive, the latest move in relation to LTVs is bordering on “regulatory creep”.

Clark says: “We know they want to regulate buy-to-let, that is on its way and the industry is aware of it. The business about LTVs is worrying because the MMR was supposed to sort all this out and get us back to responsible, sustainable lending. No sooner had it dropped, however, than we get the LTI cap.

“It leaves the industry wondering what’s coming next – it is definitely starting to feel like regulatory creep. In the space of one year we have had the mammoth changes of MMR, we’ve had LTI caps and now LTV caps. The EU directive is also on its way and changes to secured loans and buy-to-let regulation too. Where does this end?”

Start Financial Services manager Tom Cleary agrees the Bank is extending its regulatory reach: “Why does it want control over LTVs? It is creating a problem that doesn’t exist – a point only further proved by Carney giving the Help to Buy 2 scheme a clean bill of health.

“It is more conflicting messages from policymakers and regulators. You wonder where this will all end, and more importantly what the motive is behind it. They are creeping into all facets of the market despite saying publicly that things are fine with high LTVs and the MMR is working.”

However, Association of Mortgage Intermediaries chief executive Robert Sinclair says the FPC is looking to implement controls on a macro level. He says: “There are two things working on different levels here. Affordability is looking at an individual’s circumstances and these FPC changes are looking at the macroprudential level.”

Sinclair argues lender reactions to policy announcements such as the FPC’s can constrain activity further than was intended.

“Whether or not it should be happening is a different question – do we think the level of overheating in the property market -requires that level of intervention? The other point is that lenders, in order to avoid getting caught on some of these rules, have put high-level controls in place that have constrained lending. 

“If a lender puts up a 4.5 times income limit across the board, clearly that has an impact on the market, which was never the FPC’s intention. What happens with LTV remains to be seen.”

Regulation mission creep?

  • April: FCA’s Mortgage Market Review is implemented, placing a focus on affordability checks and imposing a ban on non-advised mortgage sales.
  • June: The Bank of England announces a cap on high loan-to-income lending, stating lenders must issue no more than 15 per cent of new loans at an income multiple of 4.5 or higher.
  • September: Treasury consultation on the EU Mortgage Credit Directive proposes the regulation of “accidental landlords”, despite the UK mortgage industry lobbying for a buy-to-let exemption.
  • October: Financial Policy Committee requests additional powers from the Treasury in relation to loan-to-value ratios across the residential and buy-to-let lending sectors.

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  1. Yet more micromanagement and interference in something that is not broken, yet more costs. Oh look the budget is too small, I know lets levy………… Guess who?

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