FPC Consultation Targets Issues in Mortgage Underwriting Standards
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- How would lenders and the mortgage market respond if the Recommendation were withdrawn?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?
Related Links:
Keywords: Europe, UK, Banking, Mortgage Lending, Lending, Financial Stability, BoE, Stress Testing, LTI, FPC
Featured Experts
Jamie Stark
Risk model validation consultant; product strategist; data intelligence and artificial intelligence scientist and researcher
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
Juan Manuel Licari
Dr. Juan M. Licari is a managing director at Moody's Analytics. Juan and team-members are responsible for the research and analytics that enable our quantitative solutions. The team helps our customers solve complex business problems; adding value through data and analytics.
Previous Article
EC Platform Publishes Final Report on Social TaxonomyRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.