The FSA should stop wasting its time

Posted on 13 May 2009 by Ray Boulger

1 comment(s)

At the FSA Conference yesterday Lord Turner said "so should the FSA end up recommending limits to LTV or LTI – the headline issue on which the debate about the future of the mortgage market sometimes focuses?  I do not at present know and I make no apology for that lack of certainty. What I have tried to do today is to indicate that the issue is a complex one, which requires careful consideration and further empirical analysis, running up to the FSA September Discussion Paper, and indeed subsequently, in a wide ranging debate.”

He added “"We do not need to rush to decision. We do not face today, nor are we likely to face anytime soon, the danger of irrationally exuberant behaviour by either borrowers or lenders.  We have time to get it right. And getting it right is very important given the huge importance of the mortgage and housing markets, to individual households, to banks, building societies and other credits intermediaries, and to the macro economy."

I agree 100% with the second paragraph but the answers to the questions raised in the first paragraph are very simple - the regulator should definitely not limit Loan to Value or Loan to Income multiples. The new regulatory system set up by Gordon Brown failed abysmally to even mitigate the problems that have come to light over the last couple of years. The FSA must obviously accept its share of responsibility for the regulatory failure, but it is only fair to point out that it was following the remit set it by Gordon Brown.

However, after any regulatory failure it is normal to see both politicians and regulators overreact and shut the stable door after the horse has bolted, which just makes the situation worse as it makes the recovery more difficult. The FSA is hiking its fees astronomically for the current year and the last thing we need is for it to waste money with an extensive review on whether to impose limits on maximum LTVs and maximum LTIs.

I will give just a couple of examples why they should not impose such limits. Lenders have cut back massively on maximum LTVs and even though 90% LTV mortgages are available many applicants get rejected because their credit score is not high enough.

But think about borrowers in negative equity. The lender will already have had to set aside a sizable amount of extra capital to support these mortgages under the Basle 2 rules, simply because the LTV has increased as a result of the property value falling. However, the borrower can’t move unless they have substantial savings as they generally won’t be able to borrow more than 90% of the value of the property they want to buy. Some lenders are now looking at allowing borrowers to port their negative equity, which would allow them to move.

For example someone with a property worth £150,000 but a mortgage of £165,000 could buy a new property for £200,000 and borrow the full £200,000 plus the £15,000 of negative equity. The lender is no worse off than they were (in fact they are better off as the new LTV would be 107.5%, whereas the previous LTV was even higher at 110%.) The borrower can move, which may make enable them to take up a new job in a different part of the country.

Any maximum LTV cap would prevent the lender offering their customer this helpful facility.

Likewise, on income multiples, someone earning £100,000 can afford to borrow a higher multiple than someone earning £20,000 because they won’t spend 5 times as much on the basics of life as someone earning £20,000 and hence can allocate more to paying the mortgage.

And so the message to the FSA is leave well alone.

Categories: Mortgages, Regulation

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