On 7 October 2014, the Central Bank of Ireland published Consultation Paper 87 (Macro-Prudential Policy for Residential Mortgage Lending). A copy of Consultation Paper 87 is available here.
The Central Bank of Ireland (the CBI) is proposing to introduce new regulations in relation to residential mortgage lending. The stated aim of the proposed regulations is to enhance the resilience of the banking sector and households to housing market developments. The proposed regulations will introduce new restrictions on both the loan to value (LTV) and loan to income (LTI) ratios which banks and regulated non-bank lenders such as retail credit firms apply when determining the maximum amount of credit they can extend to a purchaser of a principal dwelling house (PDH) or a buy-to-let property (BTL).
The CBI has considered the appropriate levels of new restrictions in respect of LTV and LTI ratios by analysing the international market. It noted that “macro prudential” tools are already being implemented globally, with a particular focus on the housing market. The consultation paper states that Norway and Sweden have limits on LTV ratios of 80%for new residential mortgage lending, while Finland has a limit (which takes effect in 2016) in respect of real estate loans of 90% (95%for first time buyers) which is weighed against the value of all collateral. In the UK, an LTI cap of 4.5 times salary was introduced in 2014 on 85%of new lending.
The purpose of an LTV limit is to impose a requirement for borrowers to provide a minimum level of deposit based upon the value of the property. The CBI states that lending at high LTVs was common before the financial crisis, with 29% of new loans being issued at over 90% LTV in 2006. Furthermore, it believes that setting an LTV cap will help to prevent “extreme pro-cyclicality” in respect of property lending. The aim of introducing an LTI limit is to reduce the risk of a borrower defaulting on a loan due to a loss of income. The consultation paper indicates that the combination of LTV and LTI caps will create a buffer for both lenders and borrowers against fluctuations in the property market.
The CBI has also set out some additional measures which may be introduced in the future but which are not included in the proposed regulations. It considered a countercyclical capital buffer which would require banks to hold additional capital in times of strong credit growth per the European Union (Capital Requirements) Regulations 2014. A ceiling in respect of a household’s debt-to income ratio (DTI) was also contemplated, and the CBI notes that a DTI may be introduced once a centralised Credit Register is created. Finally, an exemption for the LTV limit in respect of those loans which are adequately insured will also revisited at a later date.
The proposed regulations will introduce an LTV limit of 80% in respect of new residential mortgage lending by banks and regulated non-bank lenders to borrowers for the purchase of property. This includes both equity releases and any top ups on mortgages that would bring the LTV on that property above the cap of 80%.
In respect of investment properties, i.e. BTLs, , the proposal limits new BTL loans above 70% LTV to 10% of all BTL loans issued within a six month period.
In order to allow lenders to utilise their discretion in respect of LTV limits, the proposed regulations permit 15% of new lending to take place above the LTV cap of 80 per cent. This discretion is intended to address borrowers such as those who are unable to provide the necessary deposit but are creditworthy, as well as younger borrowers where it is reasonable to assume that their income will increase in the future.
The proposal sets out three important exemptions from the LTV limits. Specifically, it exempts (1) switcher mortgages (with no increase in principal); (2) mortgages in arrears (i.e. alternative repayment arrangements or other options agreed with a borrower, the purpose of which is to resolve a borrower’s pre-arrears or arrears situation); and (3) any loan for the purpose of clearing residual debt from negative equity mortgages.
The CBI is also proposing to introduce an LTI limit for PDHs of 3.5 times loan to gross annual income. It is proposed that 20% of new lending above this level would be permitted. Both equity releases and any top ups on mortgages that would bring the LTI on that property above the cap are within the scope of the proposed regulations. As annual income is likely to change over time, the CBI has noted that lenders should not rely solely on the LTI limit when determining whether or not to lend to a particular borrower.
The proposal sets out three exemptions from the LTI limit, namely: (1) BTL mortgages; (2) switcher mortgages with no increase in principal; and (3) mortgages in arrears where alternative repayment arrangements or other options have been agreed with a borrower.
Banks and regulated non-bank lenders will be required to submit data on actual drawn loan balances via a specific template. Those who issue housing loans of €50 million or more over the period of 2 quarters must provide the data on a six monthly basis (or a period that the CBI specifies in writing). It is important to note that the first period of calculation will begin as soon as the proposed regulations come into effect. The CBI has highlighted that one the proposed regulations are finalised, they will become effective shortly thereafter.
The CBI has raised 12 specific questions and invited all stakeholders to make submissions in respect of the proposed regulations by 8 December 2014. It is expected that the regulations will take effect in January 2015.
Mortgage Arrear Statistics
Separately, on 2 September 2014, the CBI published statistics in respect of mortgage arrears and repossessions which help to provide context to the proposed regulations. Some of the key figures include a decrease of 4.7 per cent in the number of mortgage accounts for PDHs in arrears. This is the fourth consecutive quarter where a decrease has taken place. PDH mortgage accounts in arrears over 90 days also continued to fall during Q2 for the third consecutive period. However, the CBI highlighted that there is a continued increase in very long term PDH arrears (i.e. those accounts in arrears for over 720 days).
BTL mortgage accounts in arrears over 90 days increased by 2.3 per cent during the second quarter of the year. Similar to the trend in respect of long term PDH arrears, BTL accounts in arrears over 720 days increased by 9.4 per cent.
It remains to be seen what impact the CBI’s use of the macro-prudential measures explained above will have on the domestic housing market, which, in Dublin at least, has seen significant price increases in the last 12 months. Whilst in the short-term there may be a pre-Christmas race to complete house purchases or obtain mortgage approvals, it is hoped that the long-term impact is a more stable and sustainable housing market, which should benefit both the domestic mortgage lenders and home owners. If the measures are successful, it will be interesting to see if the CBI is emboldened to employ macro-prudential measures in other credit sectors where it identifies issues that it believes it can remedy.