Rumoured proposals from George Osborne on capping LTVs
Posted on 16 June 2010 by
One of the proposals floated in the Turner Review, published in March last year, was for a cap on the maximum Loan to Value (LTV) and maximum Loan to Income (LTI) allowed on mortgages. These proposals are thought to have been included after political pressure directly from Gordon Brown, but it was clear from the way they were presented in the Review that Lord Turner had reservations about introducing such a policy.
After consulting on the proposals the FSA very sensibly decided that it would be inappropriate to impose a cap on either maximum LTV or LTI. It therefore seems surprising, if today’s reports are correct, that a Conservative Government is considering interfering with the market by imposing an LTV cap less than a year after the idea was rejected while a Labour Government was in office.
Putting a cap on the maximum LTV for a mortgage suggests a failure of Government and/or the Bank of England to understand the real reasons for the problems in our mortgage market. Despite the most severe recession since the 1930s arrears rates never rose very far and are now actually falling. Likewise repossessions last year were a third lower than the Council of Mortgage Lenders original forecast and indications are that there will be no significant change in the numbers this year.
Although low interest rates have obviously helped to keep arrears down such low rates are a consequence of the recession and thus the market has worked well in so far as the Bank of England’s reaction to the weak economy has significantly mitigated the problem which it would otherwise caused.
Before the credit crunch 25% of the £1.25trillion UK residential mortgage market was funded by the wholesale markets, primarily by residential mortgage backed securities. It was the drying up overnight of this market which was by far the major cause of problems in the residential mortgage market, not bad lending. Of course one can always find some examples or irresponsible lending, and even more of irresponsible borrowing, but this was not the major cause of problems in the mortgage market.
Because of funding constraints today’s mortgage market is in a very different place to the market up to 2007 and with the major banks plus Nationwide having to repay £300bn of borrowings from the Bank of England by 2014, with the lion’s share due next year, there are already more than enough constraints for the next few years on the ability of mortgage lenders to satisfy demand. As in any market where demand exceeds supply, and hence pricing power is with the provider, consumers, in this case mortgage borrowers, have to pay more.
That is bad enough for consumers but if an LTV cap was imposed many borrowers would be in an even worse position. They would either be denied a mortgage they could afford or driven to financing part of it in a less satisfactory way, perhaps with an unsecured loan or by using their credit card. This would particularly hurt First Time Buyers, a group that governments always claim they want to help, and also many potential movers who bought their current home near the top of the market with a highish LTV mortgage and thus now have little or no equity to use as a deposit if they move.
It would also leave borrowers with an LTV above the cap unable to remortgage and thus at the mercy of their current lender. A cap would therefore be the exact opposite of a consumer friendly policy for borrowers caught in this trap and mean that the new Consumer Protection Agency the government plans to set up should immediately be at odds with this particular rumoured policy.
A ban on UK regulated companies providing mortgages above a certain LTV would also open the door to banks in lightly regulated EU countries. Because of the EU’s move to harmonise anything that moves in the EU any authorised bank in any EU country could provide mortgages in the UK under their home country’s regulations rather than the more onerous UK regulation. This has the potential to seriously impede consumer protection for the UK borrower.
Yesterday the OFT, for very sensible reasons, announced that it had decided against limiting the maximum interest rate that doorstep and payday loan companies could charge. It recognises that the net result would be consumer detriment because many people who currently borrow from these companies would be driven to an even worse place, such as loan sharks.
It would be a seriously retrograde step for the UK Government to go back to credit controls with some similarity to those which prevailed in the 1960s and 1970s, prior to their being dismantled as one of the first steps of Margaret Thatcher’s government. In those days it was the car industry which was a particular whipping boy of the government, with the minimum deposit for Hire Purchase being significantly increased or decreased when the government wanted to rein back or stimulate the economy. The result was car factories either struggling to meet demand or going on short time at short notice, making it very difficult for long term planning.
The Basle 2 capital adequacy controls introduced on 1 January 2008 already make any lending classed by the Basle committee as more risky much more capital intensive and hence much more expensive for consumers, as well as more difficult to obtain. Thus the ability to restrict mortgage lending the Government, if today’s reports are correct, appears to be want have already been very significantly achieved with the existing regulatory landscape.
The private sector is certainly not perfect, as the banking crisis amply demonstrates, but introducing detailed controls on lending such as the maximum LTV for a mortgage is much better left to individual lenders, not the Government or the Bank of England. Part of the problem with today’s mortgage market is the number of lenders who operate a "computer sys no" policy and a Government imposed cap on the maximum LTV would in effect be a serious extension of this policy.
The regulator should stick to imposing controls at the macro level and consider adjusting those if considered necessary. Trying to micro manage the mortgage market, or indeed any other market, is not a job for government in a capitalist country. If one wants control at that level one could always go and live in North Korea!
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