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Mortgage analysis: George Osborne doffs his LTV cap

House UK Property 480

Since the downfall of Northern Rock’s 125 per cent Together mortgage in February 2008, regulators have flirted with the idea of a loan to value cap as a silver bullet to stop housing booms.

The introduction of caps has been under discussion by European regulators, the FSA, the International Monetary Fund and the UK Government since the credit crisis hit in 2007.

The most obvious vehicle for change was the mortgage market review but the FSA decided against proposing LTV caps in 2009, branding it a “blunt” tool.

The mortgage market applauded the regulator for not bowing to “populist” political pressure.

But the joy was short-lived as the issue reared its head again in February this year when Chancellor George Osborne revealed he wants the newly created financial policy committee to cap LTVs and loan to income ratios.

In March, the FPC rejected the power, claiming it is too important to society and would require a parliamentary mandate.

The FPC also argued that sectoral capital requirements are sufficient to tame high LTVs in a bubble as it would price them much higher and relieve demand.

Former British Bankers Association chief executive Angela Knight expressed similar views, saying such capital rules would keep “judgement with the individual” rather than a blunt cap.

But last week, the Treasury included LTV and LTI caps in a consultation on macro-prudential tools to be given to the FPC. The consultation closes on 11 December.

The consultation states: “The Government notes that other countries’ experiences of tightening mortgage terms and conditions – including setting maximum LTV/LTI ratios – suggest this had been a somewhat effective way to limit financial instability.”

National Institute of Economic and Social Research director Jonathan Portes believes using LTV caps as a macro-prudential tool is a sensible approach.

He says: “Our view is that an LTI cap would be sensible. The general principle is that you need to impose restrictions on mortgage providers offering stupid lending.”

But the Council of Mortgage Lenders says a cap would harm the entire housing market, including low deposit Government housing schemes such as NewBuy.

Centre of Economic and Business Research housing economist Shehan Mohamed thinks the chances of an LTV cap ever being imposed are “very slim”.

He says: “Banks are repairing their balance sheets so they are not in a position to offer 100 per cent mortgages, which is where you would consider a cap. Banks will not ever lend in the same way as they did prior to the credit crunch because post-crisis economic conditions are bleak and the fundamentals of the economy are permanently damaged.”

Association of Mortgage Intermediaries chief executive Robert Sinclair says it is unlikely that a cap would be effective.

He says: “The days of consumer credit controls are a long time ago and individuals now have access to so many different types of finance, such as unsecured loans and bridging, that it would not be simple to impose caps. I understand why the Treasury wants to give the FPC the power but I am unsure about how effective it would be.”

Sinclair says his biggest concern with an LTV cap is that it could be used in conjunction with action from other regulators such as the Financial Conduct Authority and the Prudential Regulation Authority.

He says: “If an entity tries to dampen demand in one area and other regulators take action at the same time, it could cause a bigger downturn if they are not properly co-ordinated and we could end up in bad place very quickly.”


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