30 April 2012

EMF: Mortgage Info - April 2012

The April 2012 issue covers: UK's NewBuy Scheme Off to a Good Start; UK Retail Ring-fence Proposals; BSA Responds to UK FSA's Final Mortgage Market Review Consultation; Development of the Russian Covered Bond Market; News in Brief; and The Events Agenda.

UK’s NewBuy Scheme Off to a Good Start

Home ownership is a deep-rooted aspiration in the UK’s national psyche, but in recent years it has become increasingly difficult for UK consumers to achieve in the wake of the global financial crisis. The number of new properties being built in the UK annually virtually halved between 2007 and 2010, from 224,000 to 134,000. And the number of house purchase loans taken out has dropped by around half from the 2007 number of just over 1 million. At the same time, new tighter financial regulation both from within the UK and globally has caused UK mortgage lenders to become much more risk averse, and buyers of new build properties have typically needed to find higher deposits than those buying second hand properties.

Against this backdrop, the Council of Mortgage Lenders and the Home Builders Federation (HBF) began working to develop the concept of a new build indemnity scheme as a way to increase house building and decrease the risk of lending on new build properties.

UK Retail Ring-fence Proposals

In February, Commissioner Barnier appointed a High-level Expert Group to consider the need for structural reform of the EU banking sector. Chaired by Erkki Liikanen, Governor of the Bank of Finland, the Group is to determine whether, in addition to ongoing regulatory reforms, changing the structure of EU banks would strengthen financial stability, improve efficiency and increase consumer protection. The Group will make proposals as appropriate when it reports later in the year.

Mr Liikanen and his colleagues are looking at international examples of structural reform proposals to inform their work. One proposal under consideration would be to require banks to put certain activities – such as taking deposits from retail customers and small businesses – into separate legal entities, as recommended by the Independent Commission on Banking (ICB) in the UK when it published its final report in September 2011.

BSA Responds to UK FSA’s Final Mortgage Market Review Consultation

The UK’s Financial Services Authority (FSA) has recently concluded its consultation on the final package of reforms for the UK mortgage market. This is the final consultation paper in a series that began with the publication of a discussion paper back in October 2009. Broadly, the final paper covers two key themes: Responsible Lending, and Distribution and Disclosure. The key proposals under each are:

Responsible Lending:

• Lenders should obtain proof of a borrower’s income in every case.
• Affordability should be assessed taking account of committed expenditure (credit commitments, contractual obligations, child maintenance); basic essential expenditure (housekeeping, energy bills); and basic quality of living costs (toiletries, household furniture and basic recreation).
• Interest only loans will be permitted, but under a set framework. Affordability must be assessed on a capital and interest basis. However, lenders may assess affordability on an interest only basis, where there is a clearly understood and believable source of capital repayment.

Distribution and disclosure:

• Any sales where there is interaction with the borrower will be deemed to be an advised sale, essentially giving borrowers the option of receiving advice or execution only. The current non-advised sale process will cease to exist.
• Certain vulnerable consumers (equity release, right-to-buy, sale and rent back and those consolidating debt) must always receive advice and therefore they would not be able to purchase a mortgage by a non-interactive sales process.

Development of the Russian Covered Bond Market

One of the countries with the largest potential for covered bonds is without any doubt Russia. Mortgage lending grew from RUB152.5 billion (€3.5 billion) in 2009, RUB 380.1 billion (€9.4 billion) in 2010 to RUB 713.0 billion (€17.1 billion) in 2011. The completed housing construction in 2011 (62.3 million m2) nearly reached the number of 2008 (64.0 m sqm). It is the aim of the government, that housing mortgage lending shall have a GDP share of 7.2 per cent (2015), 10.7 per cent (2020) and 15.5 per cent (2030). The estimated GDP 2012 is USD 2,117.245 billion (€1,567.981 billion) and USD 2,342.138 billion (€1,734.532 billion) in 2013. Furthermore, in 2015 50 per cent of all housing mortgage loans shall be funded by covered bond and other mortgage securities, 55 per cent in 2020 and 66 per cent in 2013.

Russian covered bonds fulfil the UCITS and ECBC Labelling requirements. Covered bonds and off-balance mortgage obligations already today are issued in a volume of RUB 91,236.7.

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