Unintended consequences

At the recent annual Mortgage Strategy Summit I addressed an audience of over 60 industry experts discussing the potential ramifications of CRD IV on the EU mortgage market. I am a born optimist so it was with regret I had to deliver some sobering news about the costs of mortgages going forward.

In their relentless attempt to punish bankers, regulators often forget that the charges banks incur in their day to day running are often passed on to customers. Therefore, if we increase the cost of lending for banks then the cost of mortgages will inevitably rise. This in turn could lead to an increase in the number of mortgage defaults as consumers struggle to keep up with higher mortgage repayments and banks scramble to repossess assets according to stricter regulations and shorter legal default notice periods. This is extremely likely to happen if we halve the number of days until default from 180 to 90.

As if this wasn’t bad enough, I then explained to the audience how an increase in the cost of lending as a consequence of Basel III and CRD IV might make the mortgage books of some businesses unprofitable, resulting in their complete withdrawal from the mortgage market. In particular, those firms who have adopted a standardised approach to credit calculation, usually small banks and building societies, have a poor chance of weathering the regulatory storm unscathed. Nevertheless, I was keen to note that a minority of firms will be able to profit from the forthcoming regulatory tsunami through snapping up the mortgage portfolios of their unlucky peers.

To conclude I examined the correlation between the maximum number of days at which default occurs and underlying risk fundamentals, and whether or not CRD IV will, and should, help lenders make every effort to assist borrowers in financial difficulty before re-possessing their property. But in many ways it can’t as there’s less time, and less budget available.

Ultimately I concluded that if regulation is necessary (which it is) then with it come associated costs, which ultimately will be passed on to the customer. The industry needs to get used to a limited number of providers and limited funding. This isn't good for the customer or the industry.