Tighter lending practices needed

Banks need to further improve lending practices in the first-time buyer mortgage market or face having new measures imposed on them, the Central Bank said today.

In a review of the sector the Central Bank and Financial Regulator found that while some progress has been made with regards oversight and lending standards, more needs to be done.

It identified several areas where banks need to improve, including detailed mortgage strategies for buyers, the use of more reliable risk measures when formulating mortgage strategies and the role of bank boards in challenging to mortgage lending decisions.

"As lending volumes remain low, the risk that current lending decisions will impact on future losses is not high. The absence of major mortgage activity creates an excellent opportunity for banks to review and enhance practices for the future," the review said.

"It is also important that this happens while the lessons of the crisis are fresh in the minds of market participants."

The Central Bank it would act if it was not satisfied that adequate safeguards were in place. Among the steps it would consider are loan-to-value ceilings, a cap on loan-to-income multiples, limiting the terms of new mortgages, removing room rentals as a criteria for assessment and imposing income verification.

The report said banks had made progress in ensuring lending decisions were based on more realistic risk assessments, with income multiples reduced to more realistic levels. Banks had also tightened controls, with fewer mortgages representing exceptions to policy, it said.

However, the review found further work was needed to improve the quality and detail of mortgage lending.

"Banks should maintain a current strategy for their mortgage business, with specific attention to strategy for first time buyers business," it said.

"This mortgage strategy should address management of both new and existing business. The strategy should provide a cohesive view of risk appetite, loan pricing, funding costs and customer suitability and may need to consider multiple views of customer and product segments."

The report said there were concerns that banks were failing to use robust and reliable risk measures, such as risk adjusted return on capital, which may undermine their risk calculations.

The review said it was particularly concerned about the absence of such risk measures where a bank was responding to competition in the market.

"All banks are expected to ground their lending in strategies appropriate to their risk appetite rather than the direction of the market as a whole," the report said. "A ‘follow my leader’ approach to mortgage strategy has not served banks or their borrowers well in the past."