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Loan To Income - Progress Of The Soft Cap

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Conversations about the so called soft-cap keeping turning up in threads where they really have no place, so I figure we can keep that debate focussed by keeping it in one place.

This is the kind of view that I see expressed on one side of the debate:

OK thanks. So it seems the FPC's so called mortgage tightening was just a rallying call for banks to lend more?

Source

As best I understand it the argument rests on something about the average LTI in 2014

It says the income multiple is reduced to 3.5 but doesn't say what was it before, the average overall was only 3.2x in 2014.

Source

It then appears to run something like this - by introducing a soft cap of no more than 15% of new lending at more than 4.5x the Bank of England was both normalising lending at 4.5x household income and calling for more lending (i.e. hoping to move the average up).

First up, Democorruptcy - do I have your argument right? Secondly, can you remind me of the source of the 3.2x figure.

I take the view that when the Bank say that they are concerned about excessive lending at high LTIs and cap it and then get stuck into BTL because they figure that BTL is driving owner-occupiers to higher LTIs then what they are trying to achieve is to make sure that owner-occupiers don't run to massive LTIs whilst chasing up house prices, (because they are concerned that an already terrible situation not become even worse).

Edited by Idlewild

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As an example, what do you make of this, Democorruptcy?

One of Britain's largest mortgage lenders has adjusted the ratio it uses to decide on loan applications, with brokers predicting rivals will follow suit.

NatWest has lowered its loan-to-income ratio (LTI) requirement for mortgage borrowers to 4.45, from 4.75, for borrowers offering deposit of between 15pc and 25pc. The multiple of salary applies for both single and joint earners.

Source: Mortgage lenders to tighten affordability ratios, Telegraph, 6 March 2016

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Good grief, this thread seems like a personal attack from a stalker.

There's this chart from the Nationwide which might be fairly representative of 2014

loan-to-income-ratios-and-house-prices%2

I'll leave you to do your own googling from June 2014 to find the press articles ridiculing a "limit" at 4.5x when the average was then only 3.2x and 15% of mortgages at greater than 4.5x when the at the time it was only 11%.

Have a nice day.

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How do they calculate that graph?>..is it all outstanding loans to current average income?

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Good grief, this thread seems like a personal attack from a stalker.

What it seems like to you may be a very poor guide to what it actually is.

You and I clearly have very different views on the intentions of the regulator and the path of LTIs. Both those things matter immensely to the future price of houses and unless there's been a mix-up this is the House Prices and the Economy sub-forum.

The purpose of the thread is not to attack you, (you could drop stone dead this evening and I'd still be interested in whether or not you were right or wrong). Crucially, it is not about you at all. I just want to know the answer. I have no skin in the game about being right, regarding my present take on things. If that is wrong I need to discard or refine it. I want to know what is actually happening.

Nothing on the source of the 3.2x figure then?

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I'll leave you to do your own googling from June 2014 to find the press articles ridiculing a "limit" at 4.5x when the average was then only 3.2x and 15% of mortgages at greater than 4.5x when the at the time it was only 11%.

OK. I will do. This City A.M article from 26 June 2014 says 3.4x and gives it as the average of new lending.

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In a February 2016 CML press release, Affordability bites?, the CML's Chief Economist, Bob Parnell writes

As we wrote in late 2014, lengthening payment terms simply reflect the affordability 'facts of life' for many mortgage borrowers.

If the impact is now showing through as upwards pressure on income multiples, then the FPC’s 15% limit risks becoming a progressively harder cap over time, and we should expect to see a build-up of lending just below the 4.5 times threshold.
Looking forward, the macro-prudential tools may help the housing market to cool. But, if house price pressures persist, then the FPC may find itself subject to much closer public scrutiny, as it exerts a more visible effect on the pace of housing activity and generates headwinds to the government’s pro home-ownership policies.
What an interesting time for the regulator to be considering interventions in the buy-to-let space!

There are some interesting graphs also, this is a good one titled "Chart 2: Lending at higher income multiples, % of all regulated lending"

20160222-chart-2-lending-at-higher-incom

The reason why I think the question is interesting and matters is that my take is that during the boom from the mid-nineties through to about 2012 the banks could lend what they damn well chose on whatever basis they chose. Once the loose lending is available, then if you chose not to borrow you'll be renting from someone who was more bullish and less apprehensive about the debt burden.

Where some see the Bank of England encouraging loose lending others see the CML trying to put political pressure on its regulator to avoid restricting lending. I don't see how both views can be correct, and it really matters which is correct, hence a thread to keep track on that seems worthwhile to me.

Edited by Idlewild

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I don't see how either case can be empirically proved, since it is a question of intention is it not?

If the % of LTIs above 4.5 has increased since, then it could be taken as either a policy success or a policy failure (in the loosest sense, it must be taken as a success in either case, but you get what I mean) depending on your interpretation of the intention.

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The crowding up is interesting though since it suggests that it would have gone higher without the cap, but it can't be taken as proof that the cap did not cause the increase in the first place.

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I don't see how either case can be empirically proved, since it is a question of intention is it not?

If the % of LTIs above 4.5 has increased since, then it could be taken as either a policy success or a policy failure (in the loosest sense, it must be taken as a success in either case, but you get what I mean) depending on your interpretation of the intention.

I'm intrigued by the idea that if the Bank of England wanted the banks to lend more to owner occupiers that they would first put in rules which shut down interest-only (which is a brilliant way to lend more) and then put in a cap for lending to blunder into later if LTIs continued to climb.

The biggest problem with the "cap as marketing" analysis is that the LTIs had been on a tear for years prior to the cap being announced, so there was obviously no need for the marketing.

LTIs%2Blong%2Brun.png

Source: BoE FSR June 2014

Edited by Idlewild

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The issue with all these stats is there is no way to remove the LIAR LOAN element.

Of course, a LIAR LOAN will fall in the maximum criteria...thats the reason they existed...they were extremely common in 2003 and before, but not through banks direct at the time.

If reasonable lending was the norm, then why in 2006-7 were all these schemes like, buy with friend, buy with a stranger, shared ownership all too common?...4 times made up income is easily achieved as the income does not bear anything to the reality.

At the other end of the LIAR LOAN is the LIAR MBS....one begets the other and there is no possibility of knowing about either if you look at the paper trail. Everything LOOKS hunky dory.

In 2008, we found out it wasnt.

If the BoE are seeing risk now in the mortgage markets, then you can be 99% sure it is much worse by an order of magnitude in actual fact.

Edited by Bloo Loo

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The issue with all these stats is there is no way to remove the LIAR LOAN element.

Agree 100%, though as certification has almost certainly improved since 2008 it seems reasonable to propose that the LTIs in the flow of new lending at the 2008 peak were much higher than the lenders' data suggests and therefore we may not be as close to peak percentages at high LTIs as the lenders' data presently suggests.

FWIW it is worth I totally agree with the point that you've made that the high multiple lending that is below the cap (e.g. 4.25x joint income) is totally bonkers and we'd be much better off if lending was restricted way below the soft cap. I guess I'm more interested in the question of whether the soft cap will eventually bite, whether it was a well-intentioned but useless piece of theatre or whether it was an attempt to drive up lending, (though I do consider the last option the most bananas and the most difficult to reconcile with the facts).

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Agree 100%, though as certification has almost certainly improved since 2008 it seems reasonable to propose that the LTIs in the flow of new lending at the 2008 peak were much higher than the lenders' data suggests and therefore we may not be as close to peak percentages at high LTIs as the lenders' data presently suggests.

FWIW it is worth I totally agree with the point that you've made that the high multiple lending that is below the cap (e.g. 4.25x joint income) is totally bonkers and we'd be much better off if lending was restricted way below the soft cap. I guess I'm more interested in the question of whether the soft cap will eventually bite, whether it was a well-intentioned but useless piece of theatre or whether it was an attempt to drive up lending, (though I do consider the last option the most bananas and the most difficult to reconcile with the facts).

I think we need to observe what they do, rather than what regulators say they are going to do...nothing much has changed other than the public pronouncements of lessons learned and what we are going to do.

Even today, banks are marking to model totally busted assets.

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I think we need to observe what they do, rather than what regulators say they are going to do...nothing much has changed other than the public pronouncements of lessons learned and what we are going to do.

I couldn't agree more. For example it's all very well finding a couple of advertorials for niche interest-only lending products, but if you use that to promote the idea that somehow the Bank of England want everyone to borrow at 4.5x joint income on interest-only terms, you'll need to explain this:

IO%2Btrend%2BFPC%2Btools%2Bpolicy.png

Source: Bank of England FPC powers over housing tools: A policy statement, July 2015

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indeed, that chart shows items buy actual count....not ratios based on a provably unreliable stat...average incomes as stated.

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It's definitely the case that terms are lengthening. The CML titled this chart "Chart One: Take-up of longer term mortgages, as % of all regulated products". The matter is obviously all very amusing to Bernard Clarke, the CML Communications Manager, he called his "News and Views" piece in December 2014 The terms they are a-changin'

02.12.2014-chart-one-take-up-of-longer-t

This commentary is striking:

Although it is early days to offer a full assessment, neither the implementation of the mortgage market review in April nor the announcement of macro-prudential actions in June appear to be significantly influencing these trends for the time being.

The latter is perhaps particularly noteworthy, given that the actions of the Financial Policy Committee are designed in part to help lean against an indefinite extension of payment terms.
While there may well be upper limits beyond which mortgage terms cannot stretch, the regional picture – although rather diverse – provides some grounds for optimism that we have not reached that point.
The unexciting inference is that lengthening payment terms simply reflect the new “facts of life” for many mortgage borrowers, but do not necessarily have implications for the short-term direction of the market.

(Emphasis added.)

I don't see the Bank of England selling narratives about the new "facts of life" that mug punters better face up to and then borrow for 35 years at 4.5x joint income, but I do see the Council of Mortgage Lenders brazenly making exactly those statements. I don't buy the idea that at the point in the game the Bank of England and the Council of Mortgage Lenders are definitely on the same side and have common purpose.

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Returning to this graph:

loan-to-income-ratios-and-house-prices%2

I just don't get how this graph is supposed to support the contention that the Bank of England wants everyone to borrow more.

The Policy Statement from which a couple of the earlier graphs were taken is a bit of a goldmine. There is this too:

Transactions%2Band%2Bapprovals%2BFPC%2Bp

If you look at the divergence between the FTBer approvals and the mover approvals in the early boom it's screams credit bubble. Consider this commentary in the statement:

Mortgage credit growth is one side of the self-reinforcing loop that can be seen in housing markets; the other is the rate of growth in house prices. Rapid house price growth increases the value of collateral, which may ease credit constraints and encourage further borrowing.

Source

The whole policy statement is basically HPC #101 and is stands in stark contrast to the "facts of life" CML narrative where house prices magically inflate of their own accord and then the good people of the CML lend whatever you need to pay what you have to pay because of the way things are.

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That jump in cash transactions in 2013 implied by the spike in transactions with an unrelated jump in approvals for purchase in the FPC policy statement Chart 8 is eye catching. There was a totally underwhelming analysis from the CML offered here, which concludes that it is old people who are purchasing their new home having sold and old home (and it passes silently over how they sold their home without producing a corresponding mortgaged buyer). Very speculative, but it occurred to me that the one thing not covered by the Chart 8 is BTL remortgaging, which was going wild at that point.

TiL%2BBTL%2Badvances.png

Source: BoE Trends in Lending April 2015

Now by that point (2013) lenders have generally introduced caps both on the total value of loans they'll extend to a given BTL investor and the number of properties that they'll lend against. Could it be that BTLers who were at these limits remortgaged whole portfolios at the cheap rates on offer and then used the cash extracted by refinancing to make cash purchases?

Edited by Idlewild

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Anyway, disregarding the nuttiness of straying off-topic when you are essentially talking to yourself, back to the topic.

The below is from a Bank of England PowerPoint that google threw up.

BoE%2Brandom%2Bppt%2BLTI%2Bchanges.png

Hence the imagined "rallying call for banks to lend more" resulted in Santander moving first-time buyers from a situation where they could borrow six time joint income to a maximum multiple of 4.49. Not much of a rallying call.

MCuJtxo.gif

The lenders listed in that BoE table as putting in lending caps accounted for over 65% of the mortgage market in 2014, according the CML in September 2015.

Edited by Idlewild

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It's a shortage of qualified borrowers that's kept LTIs below 4.5x joint, not the BoE.

Average gross household income (including cash benefits) of non-retired UK households, fy ending 2014 was £45K (ONS).

http://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/theeffectsoftaxesandbenefitsonhouseholdincome/2015-06-29

Average gross household income of prospective mortgage applicants << £45K (typically, younger and poorer).

Average UK house price 2014 ~£190K (Nationwide).

You do the math. Prices are already beyond 4.5x joint for typical borrowers, which presumably explains why (in the absence of liar loans) post Crash lending volumes collapsed and then failed to recover. One can only assume that commercial considerations viz elevated default risk, especially with the Bank Rate at an improbable 300yr low of 0.5%, prevent lenders from running their entire books at 4.5x joint.

The Council of Mortgage Lenders is a professional body that represents 95% of UK mortgage lenders (soon to be merged with the BBA). Its narrative is the narrative of commercial banking. The BoE is the statutory financial regulator. Conflict between them is natural, essential even, if the UK is to avoid a repeat of 2008. Nothing I've seen as yet has convinced me that there's sufficient distance between the two.

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It's a shortage of qualified borrowers that's kept LTIs below 4.5x joint, not the BoE.

Average gross household income (including cash benefits) of non-retired UK households, fy ending 2014 was £45K (ONS).

Seems about right to me zugzwang. After all.... we're not pushing and falling over each other, here. And neither are that many renter-saver family and friends contacts I have outside of the forum. Vs these prices, they don't want to borrow large. Some do of course, but they make their own financial decisions, in a market where many would like to be home-owners.

With government borrowing now absorbing so much of the total credit activity, even some conventional economists have begun to wonder whether still higher deficits would not do more harm than good - but to this point there has been little retreat from the view that easy money and more spending can get the economy moving again. There is a particularly firm conviction among business economists that feeding reserves into the banking system at an artificially low price will assure a pick-up in nominal growth with a variable lag of about eighteen months.

We doubt this for several reasons. First of all, there is a structural impediment that limits the price reduction of credit. Nominal interest rates in the banking system cannot fall below zero. Banks cannot pay people to take money away. Furthermore, people who borrow money must be able to retire their debt. This limits the willingness of creditors to lend and of borrowers to use the available reserves to create loans. At interest rates above zero, investment generated by new debt must produce a rise in income higher than the interest rate, and sufficient to amortize the principal. Otherwise, any additional debt is contractionary.

The crux of the issue is whether running down the balance sheet buys recuperative time or merely postpones the inevitable. We suspect it is a policy of postponement, not prevention. It is the equivalent of encouraging a man who is afloat over his head to tread water rather than turn back to shore. Unless he is able to regain solid footing, he will eventually become exhausted and drown. So it is with an economy floundering in red ink. The multi-trillion-dollar losses are real. They can only be disguised until the good credit of governments is exhausted.

-Davidson

Seen the BTLers on the double down past few years. I'd lend to these eager BTLers, if a banker. Let greed devour itself, and the smug HPI riders not to be tempted out in any number by staggering low-wave hpi gains... then HPC it.

Yes it is a bit odd - almost like there are two sets of sale price index that they are look at, one for btl and another for everyone else.

Net lending in the last year 80% btl. They are the ones borrowing against these prices, hence they are the financial stability risk.

Banks have the BTLers own homes to go for, and in a wider HPC, profitable fresh lending on much lower house prices. BTLers own home, and their former BTLs, sold back to market.

With the value of real estate collateral falling, the true market value of construction and other real estate loans will fall. Bankers and other lenders, like their predecessors of 1929, will not wish to magically turn one dollar of cash into a loan worth just eighty cents, much less sixty cents.

A common feature of economic slumps is credit revulsion. Even good borrowers find their welcome mat withdrawn. When the music stops, the attitude of lenders hardens. Banks will slash credit and call loans even to good customers. They will be driven to do this, in part, because of growing demands to hold cash. When the public raises its demands for currency, the banks have no choice but to shrink.

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If you look at the divergence between the FTBer approvals and the mover approvals in the early boom it's screams credit bubble. Consider this commentary in the statement:

Mortgage credit growth is one side of the self-reinforcing loop that can be seen in housing markets; the other is the rate of growth in house prices. Rapid house price growth increases the value of collateral, which may ease credit constraints and encourage further borrowing.

Source

The whole policy statement is basically HPC #101 and is stands in stark contrast to the "facts of life" CML narrative where house prices magically inflate of their own accord and then the good people of the CML lend whatever you need to pay what you have to pay because of the way things are.

Also known as forever HPI and majority of market participants chasing the glory, new paradigm. Then expecting bailout from renter savers, 'protect teh HPI', and shifting debt onto country's balance sheet and future generations. They just working this basic stuff out? Self-reinforcing-loop... the innocence.

Contrary to common expectation, cause and effect do not move in a simple straight line, but interact in cycles, "with the effect feeding back on the cause and perhaps amplifying it," in the words of Gary Taubes.

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