Housing associations and first-time buyers could bear the brunt of Basel reforms

27 April 2016

Housing associations and homebuyers with small deposits are among those likely to bear the brunt of proposals from the Basel Committee on Banking Supervision to revise its standardised approach for credit risk, the Intermediary Mortgage Lenders Association (IMLA) has warned.

The Basel framework ensures that banks, building societies and other deposit-taking institutions have sufficient capital for the underlying risks they bear. While supporting this objective, IMLA has raised significant concerns over some proposed revisions in the latest Basel consultation, which it argues are not justified by differences in risk and could limit access to mortgage finance in key areas of the UK housing market.

In particular, one of the most serious impacts could be on lending to UK housing associations. 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 same proposals mean the regulatory cost of buy-to-let (BTL) lending could far outweigh the risks involved, as they do not accommodate the fact that many BTL borrowers are substantially more financially secure than the average owner-occupier.

IMLA also strongly disagrees with proposals* which could distort mortgage pricing and push up the cost of higher loan-to-value (LTV) mortgages, which are relied on by many first-time buyers to become homeowners.
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.

IMLA’s consultation response highlights how aspects of the Basel 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

*This refers to proposals on risk weighting of residential property loans by LTV ratio on an untranched basis

Peter Williams, Executive Director of IMLA, comments

“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.”

For further information please contact:

Tora Turton / Maham Uzair / Will Muir, Instinctif Partners

Tel: 0207 427 1422 / 29 / twc.imla@instinctif.com

Notes to Editors

About IMLA

The Intermediary Mortgage Lenders Association (IMLA) is the trade association that represents mortgage lenders who lend to UK consumers and businesses via the broker channel. Its membership of 50 banks, building societies and specialist lenders include 18 of the 20 largest UK mortgage lenders (measured by gross lending) and account for about 90% of mortgage lending (91.6% of balances and 92.8% of gross lending).

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