Housing associations and homebuyers with small deposits may well suffer as a result of proposals set out in the Basel Committee on Banking Supervision’s latest consultation, the Intermediary Mortgage Lenders Association (IMLA) has highlighted in a new report.
The Basel framework was designed to ensure that banks, building societies and other deposit-taking institutions have sufficient capital for the underlying risks they bear.
While IMLA says that it supports this objective, it is concerned that some of the proposed revisions to its standardized approach to credit risk, as set out in the latest Basel consultation, are not justified by differences in risk and could limit access to mortgage finance in key areas of the housing market.
“…one of the most serious impacts could be on lending to UK housing associations,”
states IMLA in the report.
“By preventing lenders from taking into account borrowers’ financial strength, the Basel proposals could see loans to many housing associations redefined and subject to much higher capital requirements, despite the exemplary payment track record and their government regulated status.”
The report goes on to highlight that the proposals would mean the regulatory cost of buy to let lending could outweigh the risks involved, as they do not take into account the fact that many buy to let borrowers are more financially secure that the average owner-occupier.
The association has also come out against proposals, which it believes could distort mortgage pricing and push up the cost of higher loan to value (LTV) mortgages, which many first-time buyers rely upon to make their first step onto the housing ladder.
“Doing so could incentivise them to seek out unsecured ‘top-up’ loans to fund their house purchases with a lower LTV mortgage, which would be potentially harmful to their finances,”
says the report.
IMLA outlines the following concerns as to how the Basel Committee’s proposals could:
- create a “bizarre” situation where unsecured lending can be given a lower risk weighting than secured lending to the same borrower
- penalise lenders that have adopted conservative lending standards
- create an artificial incentive to lenders to remortgage or ‘churn’ customers, creating outcomes that would not be deemed good for either the customer or the lender
Peter Williams, executive director, IMLA, said:
“It is vital to have the right checks and balances in place so lenders can provide mortgage finance where there is a legitimate need while maintaining a stable UK housing market.
“The Basel consultation sets out with the important aim of ensuring capital requirements are appropriate to the underlying risk, but we are concerned that the current proposals will not meet this goal.
“Government and industry need to work together to bring greater balance to the UK housing market. This includes ironing out the technical details of the Basel proposals to defend consumer interests across all housing tenures.”