The Financial Policy Committee (FPC) is seeking views on a proposal to withdraw the affordability test recommendation, which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. The consultation period will end on May 06, 2022 and the decision to withdraw the affordability test recommendation will be made within 12 months.
FPC had, in 2014, introduced two recommendations to guard against a loosening in mortgage underwriting standards. The recommendations introduced were the the aforementioned "affordability test" and the loan-to-income (LTI) "flow limit," which limits the number of mortgages that can be extended at LTI ratios at or greater than 4.5. The latest FPC review, which was published in the December 2021 Financial Stability Report, suggests that, out of the two recommendations, the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households when house prices rise rapidly. FPC has judged that the LTI flow limit, without the affordability test recommendation, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable, and more proportionate way. Thus, FPC has decided to maintain the LTI flow limit recommendation and to consult on withdrawing its affordability test recommendation.
Consequently, FPC is seeking feedback on the proposal to withdraw its affordability test recommendation and on responses to the following questions:
- What impact is the affordability test recommendation having on the mortgage market?
- How would lenders and the mortgage market respond if the Recommendation were withdrawn?
- What effect withdrawing the Recommendation may have on the housing market as a whole and on particular segments of the market?
Keywords: Europe, UK, Banking, Mortgage Lending, Lending, Financial Stability, BoE, Stress Testing, LTI, FPC
Douglas W. Dwyer leads Corporate Credit Research in Predictive Analytics. This group produces credit risk metrics of small businesses, medium sized enterprises, large corporations, financial institutions, and sovereigns worldwide. The group’s models are used by banks, asset managers, insurance companies, accounting firms and corporations to measure name specific credit risk for a wide variety of purposes. We measure credit risk using information drawn from financial statements, regulatory filings, security prices, derivative contracts, behavioral and payment information. For each asset class, the methodology is developed based on the available information for each obligor. <br><br> Current projects include developing a climate adjusted probability of default and incorporating ESG factors into credit analytics. We also are developing an approach to produces comparable PDs across asset classes that opportunistically uses whatever information is available. <br><br> Prior to working at Moody’s Analytics, Dr. Dwyer was a Principal at William M. Mercer, Inc., in their Human Capital Strategy practice. Dr. Dwyer earned a Ph.D. in Economics at Columbia University and a B.A. in Economics from Oberlin College.
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