Friday, August 28, 2009

Mortgage drought for FTBs thanks to Basel II (?)

First-time buyers may need 60 per cent deposit

'The “Basel II” (pronounced “barl”), an international finance directive introduced in January last year, is the main reason that buyers with small deposits are being turned down for home loans. “It looks to everyone like the credit crunch is to blame for the lack of deals for first-time buyers. While this has obviously had some impact, Basel II is also very relevant,” says Ray Boulger, of John Charcol, the mortgage broker.' The Times reckon that due to Basel II regulations, FTBs might require a 60% deposit to get the best rates compared with 40% right now.

Posted by quiet guy @ 01:20 AM (1887 views)
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12 thoughts on “Mortgage drought for FTBs thanks to Basel II (?)

  • little professor says:

    Complete and utter nonsense from start to finish. The author of the article lacks even the most basic understanding of what the Basel II accord entails, or how it will affect banks and end-consumers. The conclusion that it will lead to 60% deposits being required is preposterous. And the gratuitous europhobic jibe “You can’t do anything if it doesn’t comply with the EU” is completely disingenuous – Basel is an international accord and has nothing to do with the EU, unless you think Canada, Japan and the US are EU members.

    Honestly, even Stuart Lawzzz doesn’t post such incompetent drivel.

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  • Basel (English pronunciation: /ˈbɑːzÉ™l/; German: Basel, pronounced [ˈbaːzÉ™l]; French: Bâle [bÉ‘l]; Italian: Basilea [baziˈlɛːa]; Romansh: Basilea: [baziˈlɛːa]; Drunken upper class twit: [barl]).

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  • @Little Professor

    Thanks for feedback. I’d like to respond with a couple of points.

    I said that The Times claim that FTBs might require a 60% deposit to get the best rates.

    Regarding the EU, see paragraph 3 at http://www.cml.org.uk/cml/policy/issues/721 although I agree that this could have been made clearer.

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  • Who paid for this advert?

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  • My understanding of Basel (one and two) and im no expert, is that it does restrict how low capital is related to assets. Those assets are assigned a weight. I will leave it to more illustrious banking posters to fill in some details but this link might help:

    http://www.cml.org.uk/cml/policy/issues/721 [yes i know its the Council of Mortgage Lenders!].

    and particularly these points:

    19. Does Basel II have any practical implications for consumers? If so, what are they?

    For lenders, Basel II is an internal management exercise that does not directly affect customers. However, there has been a good deal of talk about Basel II leading to greater risk-based pricing in loan markets, as it increases the difference in capital required between risky and safer lending categories. This could lead to riskier types of debt, such as consumer finance, costing more relative to safer categories such as mortgages then they do now. However, many lenders already use risk-based pricing, especially for higher risk lending such as sub-prime mortgages and consumer loans, and the impact of Basel II on consumers does not seem to have been very noticeable.

    20. Will Basel II increase the likelihood of risk-based pricing in the mainstream mortgage market?

    It is thought by some commentators that a lower capital requirement for mortgage loans could lead to lower mortgages rates. However, it should be remembered that non-deposit taking institutions, many of whom are active in the mortgage market, have never been covered by the Basel Accords. Moreover, many of the largest lenders already use risk-based pricing. All this suggests that the impact on pricing in the mortgage market may not be as large as some predict.

    21. How much does Basel II matter – is it just a technical exercise, or is it genuinely making a difference to the way that financial institutions run themselves?

    The transition to Basel II was a major exercise with some larger lenders spending between £50-100m on implementation. Probably its greatest effect will be on raising the standard of risk management across the lending industry and increasing the understanding of senior management in issues related to risk.”

    All in all the banks themselves still price risk, and would have priced risk based on their beliefs relative to potentially profitability of asset (loan) classes. In addition as i understand it SIVs and shadow banks were not subject to the rules, so the arrival of the Basel accords is tantamount to pushing a door that was wide open so its a jar but that the banks themselves have slammed it locked it with a double mortice and put the key in a safe.

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  • whoops sorry quiet guy – didnt notice your link till i posted mine!

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  • I suppose this is an attempt to get people to dive in to the market now (and prop it up) – but don’t despair – the more people who dive in now, this leaves fewer to compete with when it really plummets – more bargains for the rest of us…

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  • I think Basel 11 will cause the banks to spend more money on compliance or the appearance of compliance. It all revolves around capital allocation being more ‘risk sensitive’ but it gives inadequate definitions of capital and risk. One of Basel’s biggest aims is to reduce regulatory arbitrage but I think that this type of regulation (it’s only a guideline actually) actually creates more opportunities for regulatory arbitrage.

    It is therefore a bit of a stretch to link a requirement for 60% mortgage deposits to this regulation. Ray Boulanger would criticise honey and jam if he thought they restricted lending

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  • The Basel accords are the idiotic agreements that banks can count ‘assets’ as a reserve against a run, rather than having to keep cash reserves. These accords are the rules that have enabled banks to lend way above 100% loan-to-deposit ratios, and thereby turn all finance into a massive pyramid scheme.

    With cash reserves, it doesn’t matter whether the ‘assets’ are marked to market or to model, because they have no influence on how much the banks can lend. With rising asset prices, banks could lend ever more money as theoretically the asset, if sold, could cover more risk. With falling prices, suddenly the bank must not only not lend any more money (crunch) but must in fact call in numerous loans (cancelling business overdrafts and crushing the economy).

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  • The financial regulator in each economy sets the minimum capital requirement ratios for banks. Basel II describes how to calculate the lower capital limit, so most regulators say to follow Basel. Banks can hold more capital than the minimum, and most reputable banks do.

    The big difference between old Basel regulations and new Basel regulations is that special purpose vehicles are kept on the banks balance sheet. The growth in CDO’s and MBS’s is down to the structure of the old Basel regulations.

    You could blame the old Basel regulations for causing the massive availability of credit, and the subsequent credit crunch.

    NB: The Spanish regulators didn’t follow Basel, instead adopting their own policies.

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  • CDO’s = Collateralized Debt Obligations
    MBS’s = Mortgage Backed Securities
    (and I shouldn’t have used the apostrophes)

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  • The article is broadly correct (by times standards) but is written from the point of view that pre 2007 was ‘normality’.

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