Mortgage Lenders Operate On Rate For Risk Basis. Main Mortgage Rate Impacts Are Loan To Value, Bad Credit & House Type. Second Mortgage Rates Are Normally Higher Than First Mortgages. Some Lenders Still Offer Mortgages With Defaults.
The Council of Mortgage Lenders, perhaps better known as the CML, has issued its response to new changes by international banking regulators to the rules for assessing credit risk under the proposed Basel III reforms to the global financial sector.
Outlining its stance on the new consultation document, entitled Revisions to the standardised approach for credit risk, which was submitted in early March, the CML argued the proposed new rules surrounding prime residential and buy-to-let lending are not fully justified and could pose a risk to the UK mortgage industry.
The CML believes that in its current form, the Basel scheme will impose capital requirements that are excessive relative to the risk of the underlying assets and this is a situation that would likely affect the cost and availability of mortgages for consumers.
Examining the evidence on which the Basel Committee on Banking Supervision has determined its current set of proposals, the CML claims that the methodology of only allowing national supervisors to be able to require lenders to adjust property valuations downward is flawed.
It means that property values can be shifted downwards when determining the feasibility of loans and while values may subsequently be revised upwards again, they cannot be increased to a level exceeding the original valuation.
If this does become the case, it will mean lenders are less able to correctly ascertain the value of a property over the long-term, which in turn, could open them up to increased risk.
The CML has argued: `Failing to use the most reliable valuation may distort the amount of capital lenders are required to hold against a loan.`
Other issues were raised with the proposals concerning loan-to-value and the capital required to protect against default, as the proposed new rules mean that even small changes in LTV could have disproportionate effects on a lender`s requirements to hold capital.
Summing up, the CML stated: `We believe that the Basel committee`s proposals for reforming the standardised approach to assessing credit risk would have unintended and negative consequences for both prime residential and buy-to-let mortgage lending in the UK.`
The body concluded that should the committee introduce reforms that do not properly reflect UK market conditions, there is a very real risk of significant detriment for both consumers and businesses alike in the medium to long term.
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