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FSA says limiting LTVs may be on the cards

The Financial Services Authority has confirmed that limiting LTVs may be on the cards following a mortgage market review due in September.

Lord Turner, chairman of the FSA, has published a widely anticipated report today which reviews the global banking sector on a wider scale.

Data included in the report shows that the number of mortgage products allowing over 100% LTV almost doubled from 3.9% in 2005 to 7.4% in 2007.

Income multiples also grew rapidly during this period.

The percentage of loans which had initial income multiple of over 3.5 x income went from 20% to 30% during 2005 and 2007.

The report also says that both borrowers and providers “relied imprudently” on the assumption that ever rising house prices would reduce the risks otherwise inherent in high LTVs.

It says: “Some customers assumed that there would always be a supply of new remortgage offers to allow refinancing when initial low interest rate periods ended.

“Some providers assumed that initials LTVs would fall rapidly over the contract to reduce their risks.”

Arguments against doing it would be that LTV caps would make it harder for people to get on the housing ladder. It adds that a high LTV would be preferable to a borrower making up the deposit with some form unsecured lending.

But the report says: “There are three potential rationales for mortgage product regulation:

• Protecting customers against the consequences of imprudent borrowing;

• Protecting bank solvency against the consequences of imprudent lending; and

• Constraining over rapid credit growth and excessive property price increases, which increase the amplitude of economic booms and busts.”

It continues: “The FSA’s paper on regulating the mortgage market will assess the strength of the arguments for and against.

“It will analyse the extent to which customer defaults and bank losses are correlated to either high initial LTV or loan-to-income, and will draw lessons from international experience.

“It will also assess the merits of direct product regulation compared with other potential policy levers such as tighter regulation of mortgage selling and more aggressive use of differentiated capital requirements against mortgages of different LTV or loan-to-income.”

Alan Cleary, managing director of Exact, says that product regulation may well end up a no-go for the FSA.

He says: “Product regulation would stifle innovation, competition and would make mortgages a very unattractive asset class for investors.”

“A possible solution could be better regulation around responsible lending – in other words, you would place punitive penalties on lenders that flouted the regulation. That would stop lenders doing things that are irresponsible.”

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