The Basel Committee have proposed changes to the risk weighting of mortgage assets, which will eventually determine how much capital lenders have to set aside against different types of lending.
The CML says the proposals remain too blunt for a market as well regulated as the UK's and that if adopted as drafted, this could have an "unduly harsh effect on buy-to-let lending by lenders on the standardised approach".
The Council believes the proposed risk weights seem "ultra-conservative" relative to the actual loss experience of mortgage lending historically. A buy-to-let loan of 60-80% LTV would attract a risk weight of 90%, suggesting that such loans were more than two and a half times more risky than prime residential loans with a risk weight of 35%. However the CML says it "can find no factual evidence to support this".
The CML says that the problem is further exacerbated by adopting a "slab" structure rather than a marginal, tranched one (For example, a loan of 81% loan-to-value is not much riskier than a 79% one, but under the proposals the 79% loan carries a risk weight of 35%, while the 81% loan carries a risk weight of 45% on the whole loan, not just the portion above 80%).
The CML concluded that the proposals seem disconnected from economic realities - for example, they allow regulators to require a revaluation on property to reflect the fact that prices may fall, but not to allow upward revaluation if prices rise.
CML director general Paul Smee said:
"There are some common themes in the thrust of our responses to the Basel Committee and HM Treasury. In particular, we are concerned that an instinctively negative view of the risk posed by buy-to-let lending compared to home-owner lending appears to underpin the proposals. This does not sit easily with the evidence base, which suggests that much buy-to-let lending is undertaken at moderate loan-to-value ratios, and compares favourably with home-owner lending. We would expect regulatory intervention to be sufficiently nuanced to differentiate the risks both across and within the various parts of the mortgage market."
