Speaking at the Treasury Select Committee today Lord Adair Turner, chairman of the Financial Services Authority, confirmed the FPC had been debating whether it needed directive control to stop banks lending beyond an LTV threshold in future.
He confirmed the committee would be publishing its recommendations within the next few weeks.
Turner said: “We will be coming to Parliament and therefore government with a recommendation as to which of the [prudential tools] we should have directive control over and which should be recommendation.
“That is something that then has to be reflected in the legislation going through Parliament.
“The issue of whether those powers should include the ability to set a limit on LTV or LTI including the ability to vary that limit over time in order to slow the market down or stimulate it is one of the crucial issues the FPC is thinking on.”
Mark Garnier, Member of Parliament for Wyre Forest and a Treasury Select Committee member, raised concern that the lack of a limit prevented would-be homeowners from planning.
He asked Turner: “Isn’t it actually unhelpful to the consumer that you don’t have a published limit on this when people are planning for their house purchases?”
Turner responded saying he accepted in some way there would be advantages of a clear LTV and LTI limit but to put it into practice was “almost impossible”.
Turner added: “There are a lot of arguments for and against these. We found it was very difficult to set a LTI ratio or debt servicing ratio with a high discrimination – it was always a grey spectrum where even at quite high LTI ratios you find there were many people who were borrowing and managing to pay back the mortgage.”
Turner said LTV and LTI caps were an issue the FSA and Parliament should keep under review.
And he added: “I think the impact of our requirement on lenders to have affordability criteria [means] we may find some of them more overtly saying what they think is a reasonable LTI above which they will have to investigate more carefully.”
Martin Wheatley, managing director of the conduct business unit of the FSA, who was also present, said: “In terms of clarity, absolutely [a cap] would allow people to plan but it does switch off mortgage availability to people who may want to borrow more than that who would have the wherewithal and be able to afford it.”
