Different mortgage perspectives (23/14)

Starting on 16 March 2020, I began writing daily blogs about the impact of the Covid crisis on financial regulation, and this has extended into commentary on regulation generally.

Suddenly, there's a flurry of activity by regulators on mortgages - the FCA's rushed guidance for firms, FCA analysis for the TSC, and now a Bank Overground paper.

What does this tell us?

The cost-of-living crisis has been with us for more than a year, and the combination of rising inflation and the shock to mortgage rates caused by Sept's quasi-budget, is creating the biggest test in the 10-year history of the UK's twin peaks regulatory system.

Each has its own driver but what we are also seeing is the FCA and PRA/Bank playing catch up on events, while implicitly defining the parameters of their responsibility.

An example came at last Monday's Bank of England/Financial Policy Committee (FPC) session at the TSC, when Andrew Bailey, Bank Governor (and ex-FCA CEO), revealed that the FCA and PRA were working from different mortgage indicators...

Apparently, the FCA looks at households with a single missed payment, whereas the PRA focuses on those that were 3m and 6m in arrears. Possibly the former is a better alert to consumer vulnerability while the latter points to when banks should make provisions, but the discussion didn't go that far so we don't know.

It's a shame the TSC didn't probe the differences, and ask how they might affect the respective actions of the two regulators, and in particular the FPC, a Bank committee on which they both sit.

And the two approaches don't easily align...

The Overground paper, which was presented at the FPC, says "The share of households with high mortgage debt burdens has increased over 2022 H2 (Chart A). The share is projected to increase further over 2023 to 2.4%, or around 670,000 households."

Meanwhile, the FCA's TSC letter states that "at the end of June 2022 there were close to 200,000 regulated mortgages in payment shortfall. That is around 2.4% of all regulated residential mortgages. In addition, we estimated … that up to an additional 570,000 mortgage borrowers may be at risk of payment shortfall in the next two years."

Given the regulators' complementary roles, the discontinuity of these statements isn't healthy.

There are good reasons why conduct and prudential regulators might focus on different indicators, but they need to be transparently cut from the same cloth. Especially for the FPC, but also at the individual firm level, it's surely critical that the authorities develop a common view of the overall situation.

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