Mortgage lending at higher loan to value (LTV) ratios declined following the financial crisis, as lenders became more risk averse. However, recent data from the Bank of England’s Credit Conditions Review on Q4 of 2016 noted a return to “greater credit availability for borrowers with LTV ratios above 75%.”
The Bank’s data showed that the number of mortgage products has increased, with the largest increase being amongst the products with LTV ratios between 75% and 89%.
Respondents to the Bank’s Credit Conditions Survey also noted “an increased willingness to lend to borrowers with LTV ratios greater than 90% in recent years.”
This has prompted some market commentators to warn that this may expose the lending market to unnecessary risk. An example is property-backed P2P lender Lendy, which has urged banks to fully learn the lessons from the credit crunch.
Lendy noted an increase of over 1% in the number of residential mortgages that were written at 90% LTV since 2016. The figure now stands at 4.5% of residential mortgages.
According to Lendy co-founder Liam Brooke, “banks may be drifting back towards more risk taking in the mortgage market.” He added: “Lending at 90% or more LTVs lets them grow their loan books quickly, but it does raise the question of whether they have learned the lessons of the credit crunch.”
Despite these warnings, it is worth bearing in mind that that the value and number of mortgages at very high LTV ratios remains lower than pre-crisis levels. At the pre-crunch peak in Q2 of 2007, 16% of mortgages were written at 90% LTV or above.
A different industry report, comparing UK and Irish mortgage markets, showed that high-LTV mortgages are still not a feature of the first-time buyer market.
The joint research report, published by UK Finance and the Banking and Payments Federation Ireland (BPFI), noted evidence of “loan bunching” just below macro-prudential limits on loan-to-income in both countries – 90% LTV and 3.5 loan-to-income (LTI) in Ireland; 4.5 LTI in the UK – with lending above these limits falling.
The UK Finance report was solely focused on the first-time buyer market, while the Bank of England’s data is based on the whole of the market. Nonetheless, the Bank noted that the proportion of mortgage sales at higher LTV ratios is larger for first-time buyers than for the market as a whole.
The discrepancies between both reports are difficult to reconcile, although they may be down to timing.
One thing is certain however, high LTV lending exposes lenders to more risk. Mindful of this fact, the Bank of England noted in its recent Financial Stability Report: “It could in future consider employing LTV limits to insure against risks on owner-occupier or buy-to-let mortgages”.
The Financial Policy Committee (FPC) of the Bank of England is tasked with identifying, monitoring and dealing with “systemic risks”. In its 2017 report, the Bank noted that the FPC’s existing recommendations in the mortgage market “build a degree of lender resilience that is proportionate to current risks”.
As interest rates increase, there is potentially a danger of higher default rates and increased repossessions. It is in a repossession scenario that a lender will find itself exposed to the skeletons in the title closet. Title insurance can be invaluable in these scenarios as it can often enable marketability of a distressed property.