CML: Basel changes will push up mortgage costs


Mooted changes to Basel regulation are likely to hit the cost and availability of mortgages, according to the Council of Mortgage Lenders.

The Basel Committee on Banking Supervision is suggesting reclassifying risk weighting around asset classes including prime residential, buy-to-let and lending to Social Housing Associations.

In December, the Basel committee proposed a ‘slab’ structure for risk weightings, rather than a marginal one, meaning lenders will have to set aside more capital to cover their loans.

Under the mooted rules, a loan at an LTV ratio of 81 per cent would attract a risk weighting of 45 per cent applying to the whole sum advanced, while a mortgage with an 79 per cent LTV ratio would have a weighting of 35 per cent.

The CML argues that lenders should be allowed to apply a blended risk weighting.

A CML statement following its response to the changes says: “Proposed changes by international banking regulators to the rules for assessing credit risk do not reflect the real underlying risk of those assets and would result in unduly harsh capital treatment of both prime residential and buy-to-let mortgages.”

The trade body says the risk weighting increases are not justified by historic losses.

It says: “We therefore question the way in which risk weightings have been calibrated.”

The CML says that UK mortgages are generally affordable and widely available, and that excessive capital requirements “are likely to affect the cost and availability of mortgages”.

It says: “Our submission also says that the proposals fail to make sufficient allowance for the way in which mortgage regulation has already been reinforced in the UK.

“Now that we have stress testing of mortgage affordability by the Financial Conduct Authority, for example, we believe that the BCBS places too much emphasis on historic loss data in its proposals for calculating risk weightings.”

The CML is also concerned about the BCBS’s proposals around property valuation.

It says: “The BCBS is currently proposing that national supervisors should continue to be able to require lenders to adjust property valuations downwards. Once they have done so, values may subsequently be revised upwards again – but cannot be increased to a level exceeding the original valuation.

“We think this approach is flawed. In effect, it means that property values can go down, but not up. The obvious problem is that the valuation affects the loan-to-value ratio of a mortgage. So, being able to update this to reflect true market value of a property allows a lender to operate on the basis of a clearer understanding of the potential risk associated with the loan, and the loss given default.”