The Intermediary Mortgage Lenders Association (IMLA) has warned that 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 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.
One of the most serious impacts could be on lending to UK housing associations, IMLA warns. 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 lending could far outweigh the risks involved, as they do not accommodate the fact that many buy-to-let 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 says its 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.
The trade body also believes the proposals could penalise lenders that have adopted conservative lending standards and 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 of 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.”