Mr. Olivier Hassler, Consultant, World Bank

Asia Pacific Union for Housing Finance
International Conference on Housing
April 10-13, 2013 New Delhi, India
Mortgage Lending
Overview of International Regulatory
Olivier Hassler
[email protected]
Main Lessons from the 2007-2009 Crisis
A crisis mostly acute in the US (starting point) and in Europe,
…But with global implications – contrarily to the regional , also real estate related,
crises of the 1990s, and generally valid lessons:
Do not lend irrespectively of repayment capacities
Do not base credit worthiness assessment on stated, undocumented
Create incentives for lenders to behave responsibly
Prevent or limit the use/impact of mortgages on speculation and
housing market overheating
Avoid losing track of credit risks through risk transfer mechanisms
Prevent funding mortgage loans by short term wholesale resources
The last financial crisis = the reference stress scenario behind the new global
regulatory landscape
I) Ensure Sound Underwriting Criteria
A flurry of regulatory adjustments world wide
Ex.: FSB Principles for Sound Residential Mortgage Underwriting Practices March 2011 & Apr 2012
US Dodd Frank Act Jul 2010, UK Mortgage Market Reviews Dec 2010 and 2011,
Hungary, Lithuania, Malaysia, Norway, Poland, UAE etc. since 2010
EU: preparation of a Mortgage Credit Directive
Ability to Repay = primary criteria (mortgage = safety net)
 Requirement
to verify income, no self-certification
 Assessment of free disposable income and expenditures
 Verification of total indebtedness
 Variable rate mortgages:
(simple DTIs % not enough)
Disregard initial teaser rates (fully indexed rates)
Stress tests , at origination and on an on-going basis
LTVs still important – Typically determine Risk Weights
Note: Basle III only changes Risk Weights of mortgages by setting a 20% floor for Internal rating
Bases Approach
I) Sound Underwriting Criteria,
Avoid risk layering
Addition of products and borrowers risky features: typical subprime lending, also a way
to create apparent affordability
Provide discipline incentives to lenders :
 Linkage
soundness of lending / capacity of funding: 5% risk retention rule for
securitizing originators (Basle, Mexico, US, EU)
In the US: “Qualified Residential Mortgages” exempted from the rule
 Expected loss based provisioning (Mexico)
Ensure that risk transfers do not hide risks
 Shadow
banking system: dissuasive treatment of re-securitization (Basle III,
Solvency II – new risk based prudential framework for insurance in Europe)
 Mortgage
insurance - prudent regime already in various countries (ex. India, Australia) –
Generalization: Basle Joint Forum Feb 2013 report :
 same soundness criteria as for lending,
 prudential standards = a condition to lower risk weights in lenders’ balance sheets
 no regulatory arbitrage
II) Strengthen Consumer Protection
Reckless lending targeted by most framework enhancements
Responsible lending has been defined…
Not lending against borrower’ interest
Affordability based lending
Fair information
advisory services (ex.: Office of Housing Counseling created within HUD by the US Mortgage
Reform and Anti-Predatory Act – MRAPA -, Title 14 of Dodd- Frank)
… and its legal implication strengthened
Direct legal responsibility of bankers in some systems (South Africa, France),
Important innovation in the USA:
lenders legally liable for not complying with MRAPA
 Dodd Frank / CFPB: “Qualified Mortgages” provide legal safe harbor protecting lenders against
lawsuits (“irrebuttable presumption” of fair lending)
Indirectly in many jurisdictions: unfair lending = defense against foreclosures
“Passive” over-indebtedness (post-origination hardship) = an on-going debate
Ex. EU: draft mortgage Directive, countries in economic distress
 Several options: personal bankruptcy, loan restructuring (pre-set rules? judicial discretion?)
 Risks: strategic defaults (US) , moral hazard
III) Restrict mortgage lending from fueling price bubbles
Mortgage lending far from being the main engine of market exuberance
Speculative investments, demand/supply leads and lags intrinsic to real estate market
Anti-speculative measures must first target the housing market
Taxation– see China 2013, Singapore 2009-2011 (level of registration charges linked to the
holding period, up to 16%; + 3% or 10% stamp duty surcharge for second houses)
Off-plan sales regulation to avoid purchase contract flipping (Dubai, Saudi Arabia)
Housing market observatories, price index, ratio prices/household income, stocks of unsold units,
etc. of utmost importance – Thailand a pioneer
Stimulation of affordable housing supply
Macro prudential gearing of mortgage lending of growing importance
First lever: LTVs, moved in a countercyclical way (ex.: India)
Differentiation of LTV limits: required for efficient targeting: by areas (ex. Korea), by
products (Home Equity Loans), for second & subsequent houses (ex: Malaysia,
Norway, Singapore, UAE), non- owner-occupied houses (CND 2010), or non-
individual borrowers
Dynamic provisioning (Chile, Colombia, Spain)
Risk weights also a possible variable
IV) Funding- (A): Control of underlying risks Securitization most affected
Draft revised Basle Rules sets strong restrictions to securitization (Dec 2012)
Examples of risk weights (Rating Based Approach) in %
Senior Tranches (5 years)
Non-senior Tranches (5 years)
Source: Bank of America Merrill Lynch (low thickness tranches)
However: capital charge capped to the capital requirements on underlying assets
Securitization to become largely a funding-only tool
Negative impact of new Insurance prudential frameworks
(EU, Australia)
Draft solvency II: very high capital charges – 3 to 10 times more than Cov. Bonds
Due diligence, Representations & Warranties strongly enhanced (US)
Higher disclosure requirements (see also Covered Bonds)
 Regulation:
Basle III (Pillar III), US (FDIC), EU (CRD, Draft new Market in Financial Instruments
 Market
initiatives: Prime Collateralized Securities (Asso. for Financial Markets in Europe label)
IV) Funding - (B) Improved Liquidity Management:
Basle III Liquidity Coverage ratio
Purpose : resilience to a stressed liquidity scenario (ex: downgrade, deposit run,
interruption of short term whole funding renewal) in a one month horizon
Stock of High Quality Liquid Assets
>= 1
Total net cash outflows next 30 days
qualitative & quantitative liquidity criteria
Mortgage Securities eligible HQLA – Cov. Bonds well treated, Residential MBS
introduced in Jan 2013 version:
Central Bank reserves,
marketable securities from
sovereigns, multinationals
Level I
Corporate Bonds,
II A Max = 40%
II B Max = 15%
Basle II 0 Risk Weight
> AA-
regulated Cov. Bonds
Level II
Max = 40%
Eligibility Criteria
Risk retention
LTV < 80%
Full recourse
> AA -
IV) Funding – (B) Improved Liquidity Management
Basle III Net Stable Funding Ratio
 for non easily monetizable assets, use of a minimum volume of stable
resources on an on-going basis,
 withstand a 1 year interruption of liquidity access due to rating downgrade,
loss of market confidence (avoid cliff effect of LCR)
 Stable resources: capital, secured or unsecured debt with remaining
maturity > 1 year, retail deposit base (assumptions on run-off rhythm)
 Minimum ratio required on a case-by-case basis by national regulator
Implementation: 2018?