The first was a letter to the Chancellor in response to his earlier request to provide an annual assessment of the Help to Buy Mortgage Guarantee scheme, looking particularly at the house price cap and fee charged to lenders. The FPC has not recommended any change to the scheme:
“Under current market conditions, the Committee assesses that the scheme does not pose material risks to financial stability”.
2. FPC Statement on Housing Market ‘Powers of Direction’
In June, the Chancellor asked the FPC to identify what additional powers of direction it wanted “to guard against financial stability risks from the housing market”. In yesteday’s document, addressed to Treasury, the FPC identified two powers it believes it needs to meet this objective. These are regulation of:
Loan to value ratios
Debt to income ratios, including interest coverage ratios in respect of buy-to-let lending.
It is notable that the FPC included buy-to-let lending. While this is subject to a much lighter regulatory regime that first-charge lending to owner occupiers, lending to this sector could, whether on its own or taken together with lending to owner occupiers, pose a risk to financial stability, so it needs to be included within the FPC’s powers.
It is important to stress that today’s announcement is not about what is happening to the housing market nor to LTV and LTI ratios. It is solely about the architecture or design of the regulatory scheme the FPC is constructing. The FPC has not made any changes to mortgage lending.
The FPC has two types of powers:
Powers of recommendation: these were used when it announced (26th June) new rules on bank loan-to-income ratios and the interest rates to be used by lenders in affordability testing borrowers;
Powers of direction: the subject of today’s announcement.
The FPC can issue the former at any time, but the latter require legislation before they can be used. We understand the sequence following yesterday’s announcement will be:
Treasury will respond to the document with a consultation;
treasury will produce draft legislation;
The FPC will issue a draft policy statement, we think in January, which will set out in more detail how the new powers will operate, including a range of indicators the FPC will monitor.
The intention is to have the new architecture in place by the end of the Parliament (i.e. by May).
The new FPC proposals need to be put in context. The MMR in April strengthened the regulation of mortgages covering individual borrowers. Today’s announcement, by contrast, is about the cumulative impact of mortgage lending on the housing market, and ultimately on financial stability. MMR is about the micro, the FPC’s proposed new powers are about the macro. As such, were the FPC to use one of these powers in future based on worries about financial stability, it could then remove the measure once it was satisfied the financial stability threat had gone away.
The FPC considered a range of other possible powers (e.g. mortgage terms) but concluded that LTIs and LTVs, for the time being at least, should give it sufficient powers.
Yesterday’s decision not to change the terms of HtB2 is welcome, although the scheme appears to be having very little impact on the new build sector. HtB1 is not affected.
The new powers the FPC is seeking represent a further step in the evolution of macro-regulation of the mortgage market to meet the FPC’s financial stability remit. Once the new system is set up, the FPC will closely watch a range of indicators. It will have to decide at each quarterly meeting whether it needs to use any of its powers.
John Stewart, Director of Economic Affairs
 The FPC has two objectives:
contributing to the achievement by the Bank of the Financial Stability Objective; and
subject to that, supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment.
Home Builders Federation
London, SE1 9PL
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