Despite a much-anticipated belief that the Turner Review would change LTV requirements, Turner has highlighted mortgages as something to be debated later in the year, with an offical FSA Mortgage Market Review by Q3 2009 at the latest.
The LTV issue was left as an open question for further debate: Should the UK introduce product regulation of mortgage market Loan-to-Value (LTV) or Loan-to-Income (LTI)?
In the Turner Review, he said: “In the retail market the introduction of product regulations limiting mortgage loan-to-value (LTV) or loan-to-income (LTI) ratios merits consideration. The FSA will publish a paper in September which considers these and other options for mortgage market reform… the rapid extension of mortgage credit was a key factor in the origins of the financial crisis in the US, the UK and several other countries. In the UK high initial LTV and LTI ratios played an important role…
“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: Hong Kong’s rules on maximum LTVs are for instance widely credited with enabling it to weather a major property price slump between 1998 to 2002 with only minimal impact on bank capital; and
• constraining over rapid credit growth and excessive property price increases, which increase the amplitude of economic booms and busts.
“Equally it is important to note important arguments against such restrictions:
• Requirements for lower initial mortgage LTVs or LTIs, will tend to disadvantage new entrants to the housing market who cannot rely on, for instance, family sources of money to pay initial deposits. In both the UK and the US, rapid growth in mortgage credit was seen as driving a democratisation of home ownership.
• And it can be preferable for people to have high LTV mortgages, than to achieve the same total leverage more expensively by, for instance, combining a reasonably high LTV mortgage with extensive use of credit card debt or unsecured loans.
“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 LTI, 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:
(i) tighter regulation of mortgage selling and in particular greater focus on suitability requirements
or (ii) more aggressive use of differentiated capital requirements against mortgages of different LTV or LTI .
"The paper will also consider whether more effective regulation of the mortgage market, through either tighter conduct rules or direct product regulation, would require the extension of the FSA’s remit to cover second charge mortgages and buy-to-let mortgages.”
