Should the exemptions be on the entire book or just on new lending?

[Brendan Burgess]

If the objective of this proposal is to protect the banks, then the 15% exemption for LTVs in excess of 80% should apply to the entire book.

Here is the Central Bank rationale for applying it to new business

[FONT=&quot]Rationale for a proportionate cap[/FONT]

[FONT=&quot]LTV and LTI caps can be introduced
[/FONT]

• [FONT=&quot] across the existing loan book (mainly in countries where amortisation of mortgages is slower),
  [/FONT]
• [FONT=&quot]on new lending,
  [/FONT]
• [FONT=&quot]or on a proportion of new lending (a proportionate cap).[/FONT]

[FONT=&quot]A proportionate cap involves restricting lenders’ new residential mortgage lending at LTV / LTI ratios of over a certain level to no more than a certain per cent of new residential mortgage lending. The benefit of a proportionate cap is that it recognises that high LTV and high LTI lending can be appropriate in certain circumstances. Examples could include otherwise very creditworthy borrowers who cannot raise the deposit required but who would be able to afford the loan servicing, or younger borrowers whose income can reasonably be expected to rise in the future.[/FONT]

If the chief concern is the stability of the banking system, surely the 15% exemption should apply to the whole book?

If they are trying to control new reckless lending pushing up house prices, then it should apply to new lending only.

If they were to apply it to the whole book, there would be no exceptions to the 80% LTV rule for some time as I imagine a good part of the book is already over the 80% LTV ratio.

 

[44brendan]

To me it is quite clear that the rules are prudential ones for new lending and will only apply to new loans. This is the reading of most bankers I have spoken with and the communication to date within the system is that the rules apply to new lending. As I mentioned previously the 15% restriction is a maximum figure and again should be based on the new lending figures. In practise this will be very difficult to control and will lead to minimal exceptions being approved by banks.

 

[Brendan Burgess]

Hi brendan

There is no doubt that the proposed rules apply to new lending only.

My argument is that they should apply to the entire loan book, if it's a prudential measure.

If, for example, the lender's entire loan book is <80% LTV, then they should be allowed issue lots of new loans in excess of 80%, as the total will still be <20% of the book value.

If, as would be the case now, most of the loan book is >80% LTV, then they should issue no new loans >80%, to bring the exceptions below 20%

Mind you , this would be pro-cyclical. As prices rise fast, the LTV of the existing book would fall, and they could issue lots of new loans >80%. So maybe basing it on the entire book would not be a good idea.

 

[Grimy]

Hi BB,

While I take your point, I might be wrong but I do not think that the banks effectively 'mark-to-market' the LTVs of their mortgage book. At the outset the LTV is with regard to the purchase price - but does the bank track what happens to each and every V in the equation as time moves on. Yes, I'm sure generally movements are followed, but currently it would be a pretty subjective exercise to adjust every V to current market rates . . .

It is reasonable that Vs are tracked for the market as a whole and maybe this could be used to imply where the entire book of LTVs are at, but again this would require alot of rules to monitor and ultimately be subjective.

I guess in summary, we can understand why it applies to new motgages only and I think from a practical perspective it will likely remain this way.

 

[44brendan]

Perhaps I'm missing something in your proposal Brendan! The LTV cap is loan specific. I.e. CB expectation is that 85% of all new loans issued should meet this criteria. If the edict was macro prudential and applied to the loan book then, as you say the exception limits would differ for each bank, which would defeat the loan specific prudential limits. It goes bank to a comment on another thread made by you on the purpose of the new restrictions. I.e. they are being introduced to temper bubble like price increases in the market on the basis of loan funds available to compete for a limited product. We have discussed this internally and our conclusion is that CB want to avoid a further bubble arising which could potentially lead to lending problems. We also feel that the 80% limit is likely to be reduced in time as new builds progress and more housing stock is made available.

 

[Brendan Burgess]

What would be the effect of limiting high LTV loans to a proportion of the entire book?

The reason for the lenders' losses on their residential mortgage book was that they had so many high LTV loans.

If we are concerned about the solvency of ptsb, we should be looking at the level of negative equity and high LTV loans in its entire book.

Let's say that the Central Bank permitted only 10% of all loans to be above 80% LTV and 20% to be above 70%.

At present, ptsb presumably exceeds this limit. That means that they could not give out any more new loans until they reduced the proportion of high LTV loans on the existing book below 80%.

This would increase competition for the low LTV market and presumably lower the rates as well.

On the downside, there would be fewer loans over 80%, so the lenders would charge a much higher premium on these.

Brendan