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Underwriting standards for buy-to-let mortgage contracts ,– CP11/16,PRA ,Bank of England warnings on Brexit ,clamp down on buy-to-let mortgages


The central bank said the outlook for financial stability had worsened since its last report in November, saying a rebound in Chinese lending was "concerning" and that June 23's vote on leaving the EU was now the biggest domestic risk.

BoE Governor Mark Carney came under fire from some pro-Brexit lawmakers earlier this month for exaggerating the dangers of leaving the EU, though the central bank does not have an official position on whether Britain should remain.

The BoE's Financial Policy Committee, which Carney chairs, said on Tuesday that "heightened and prolonged uncertainty ... could lead to a further depreciation of sterling and affect the cost ... of financing for a broad range of UK borrowers."

Sterling has fallen to a seven-year low against the dollar since the start of the year and markets price in extra volatility for around the date of the referendum.

While much of the BoE's concern about Brexit was familiar, less expected was its decision to tighten credit checks on landlords and move ahead with a disputed plan to vary the size of banks' risk buffers over the economic cycle.

The immediate impact of both measures is likely to be modest, but they indicate a policy direction and may have a greater effect over time if the Bank expands them.

Buy-to-let lending has boomed in Britain in recent years, and is now worth 200 billion pounds ($286 billion).

However, Prime Minister David Cameron's government has been keen to boost individual home ownership and is raising taxes on the sector, leading the BoE to fear that banks' plans to raise gross lending to landlords by 20 percent a year might come at the cost of credit standards.




TOUGHER RULES MAY COME

As a result, the BoE has recommended banks ensure they take new tax rules into account when assessing loan applications, check landlords' incomes properly and ensure rental income will be enough to cover a mortgage rate of at least 5.5 percent.

The BoE said most lenders already had similar rules, but that it expected enforcing the rules universally would reduce the number of mortgage approvals in three years' time by 10-20 percent compared with doing nothing.


PRA CHIEF  Andrew Bailey



"It's timid," Capital Economics's Paul Hollingsworth said, adding much of the gross lending growth was existing landlords switching mortgages rather than new lending. "They are doing a lot of red flag waving rather than taking some serious action."

The Council for Mortgage Lenders said the measures did not appear to curtail existing market practices.

Tougher rules may come later, however, if finance minister George Osborne follows through with plans to give the BoE more fine-grained powers over buy-to-let mortgage terms, similar to powers it has already used on residential mortgages.

The BoE also said it would start to raise the new cyclical element of its capital framework, which rises and falls as the risk of imprudent lending changes over the business cycle, after policymakers failed to reach agreement in December.

This new buffer sits on top of the minimum and is built up in good times to stop credit supply becoming too frothy, and tapped when the economy weakens and some loans turn sour.

Banks will have to hold a 0.5 percent counter-cyclical buffer by the end of March 2017. That is equivalent to a relatively modest 5 billion pounds for the banking system as a whole and halfway towards its neutral level of 1 percent.

Moreover, for larger banks the bulk of the increase to 0.5 percent will be cancelled out by a cut in another capital requirement.

"While a big symbolic step, there is unlikely to be a large impact," HSBC economist Simon Wells said.

5.The FPC welcomes and supports the Supervisory Statement issued by the Board of the Prudential Regulation Authority (PRA) to clarify its expectations for underwriting standards in the buy-to-let market.   The FPC will continue to monitor developments, including the impacts of this initiative and forthcoming tax changes, and to assess the implications for financial stability of the buy-to-let mortgage market.

13. The Committee welcomes the Bank's announcement on 7 March that it will offer three additional indexed long-term repo operations and will continue to offer dollar liquidity in weeks around the referendum, to provide banks, building societies and broker dealers with an opportunity to obtain liquidity against the full range of collateral eligible in the Bank's Sterling Monetary Framework. 
Credit conditions and buy-to-let mortgage lending

5. Nevertheless, the FPC remains vigilant to risks in this area.  With a relatively high level of household indebtedness, debt serviceability remains vulnerable to shocks to interest rates, employment or growth.  Growth of the stock of credit extended to the private sector has been driven by pockets of strength in consumer credit and buy-to-let mortgage lending.  It is now broadly in line with the growth rate of nominal GDP, which itself is weak by historical standards.

17. The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.  The outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4.  The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress.  

20. The Committee notes that growth of buy-to-let mortgage lending is likely to slow in Q2 as changes to stamp duty take effect.  Looking ahead, the combination of forthcoming changes to mortgage interest tax relief and the implementation of the PRA Supervisory Statement will probably dampen growth of buy-to-let mortgage lending relative to lenders’ plans.  The FPC will continue to monitor closely these developments and potential threats to financial stability from the buy-to-let mortgage market.

21. HM Treasury has consulted on giving powers of direction to the FPC on buy-to-let mortgage lending, and will respond to that consultation, including with final secondary legislation, in due course.  The FPC will prepare a statement of its policy for the use of powers of direction ahead of any such powers being approved by Parliament.  


News Release - Financial Policy Committee statement from its policy meeting, 23 March 2016

Available as: PDF




Consultation Paper | CP11/16 Underwriting standards for buy-tolet mortgage contracts 


​Background
This consultation paper (CP) seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts. The proposals also include clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages.

Summary of proposals

The proposals seek to ensure that firms conduct their buy-to-let business in a prudent manner. They aim to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses.

The proposals to clarify expectations in relation to application of the SME supporting factor are aimed at enhancing the transparency and consistency of the PRA’s regulatory approach.

The proposals also support the Financial Policy Committee’s ability to act from a macroprudential perspective.

The proposals are relevant to PRA-regulated firms that undertake buy-to-let lending that is not already subject to FCA regulation. The clarification regarding the SME supporting factor is relevant for firms bound by the Capital Requirements Regulation (575/2013) (CRR).

The CP proposes:


i) a set of expectations for firms that underwrite UK buy-to-let mortgage contracts where the land is intended to be occupied as a dwelling on the basis of a rental agreement, in pounds sterling, regardless of whether the borrower is an individual or limited company; and

ii) a clarification in relation to application of the SME supporting factor on buy-to-let mortgages.

Chapter 2 outlines the PRA’s proposals. Chapter 3 considers the PRA’s statutory obligations in relation to the proposals. Appendix 1 details the draft supervisory statement.

The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which covered 31 firms (c.92% of the market). This review highlighted concerns about lenders’ growth plans and how they might meet them. In particular, there is a risk that firms relax underwriting standards, thus affecting their safety and soundness. The findings suggested a need for microprudential action.


Consultation paper





1 Stress testing the UK banking system: 2014 results and the December 2014 Financial Stability Report: http://www.bankofengland.co.uk/financialstability/Documents/fpc/results161214.pdf andhttp://www.bankofengland.co.uk/publications/Pages/fsr/2014/fsr36.aspx
2 Consultation Paper 11/16: Underwriting standards for buy-to-let mortgage contracts, March 2016 -http://www.bankofengland.co.uk/pra/Pages/publications/cp/2016/cp1116.aspx
3 As set out in the December 2015 Financial Stability Report and the Supplement to the December 2015 Financial Stability Report: The framework of capital requirements for UK banks:
http://www.bankofengland.co.uk/publications/Documents/fsr/2015/dec.pdf and
http://www.bankofengland.co.uk/publications/Documents/fsr/2015/fsrsupp.pdf
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