Asia Pacific Union for Housing Finance
International Conference on Housing
April 10-13, 2013 New Delhi, India
Mortgage Lending
Overview of International Regulatory
Developments
Olivier Hassler
ohhfinance@gmail.com
1
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
incomes

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
2
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
3
I) Sound Underwriting Criteria,

Ctd
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
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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
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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
dynamics

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
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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)
AA
97
233
(currently)
(8)
(15)
A
141
360
(currently)
(12)
(20)
BBB235
689
(currently)
(100)
(100)
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
Directive)
 Market
initiatives: Prime Collateralized Securities (Asso. for Financial Markets in Europe label)
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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

LCR =
------------------------------------------------------
>= 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:
Assets
Central Bank reserves,
marketable securities from
sovereigns, multinationals
Level I
Corporate Bonds,
II A Max = 40%
II B Max = 15%
RMBS
Haircut
Basle II 0 Risk Weight
0%
> AA-
regulated Cov. Bonds

Level II
Max = 40%
Eligibility Criteria



Risk retention
regulation
LTV < 80%
Full recourse
mortgages
> AA -
15%
25%
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IV) Funding – (B) Improved Liquidity Management
Basle III Net Stable Funding Ratio
Purposes:
 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)

Structure:
 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?
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