UK homeowners could face higher mortgage costs and greater risk of foreclosure next year because of an obscure clause in the bank capital directive being worked on by the European parliament.
As part of a large reform package that seeks to make banks safer and regulation more uniform, the draft directive declares that all European Union loans must be treated as if they are in default when they are 90 days in arrears. While this is common practice in much of the 27-nation bloc, it would overrule UK rules that give retail mortgage borrowers up to 180 days.
The definition change pushes up the probability that mortgage loans will default, a key metric in determining capital charges. It will boost banks’ capital charges on UK mortgages by 15-20 percent, forcing many institutions either to cut lending or charge more to customers.
The tighter deadline will also give banks less time to work with struggling customers, a process known as forbearance, and could push thousands of extra borrowers into default.
“We are looking at a very worrying development. Whole books of business become unviable,” said Clive Stanton, head of risk at the Rule Financial consultancy.
Italian public sector borrowers will also be hit but the Bank of Italy does not expect the impact to be as great.
About half of 1 percent of the UK’s 13.6 million mortgages are already in “forbearance” compared with 1.2 percent of mortgages that are in arrears, according to the Bank of England’s financial stability report. Without forbearance, the arrears rate would be nearly 50 percent higher, the Bank said.
The British Banking Association said the 90-day definition was one of their “top concerns” with the draft, because struggling customers needed the extra time to refinance or trade down to a smaller home.
“We believe that the reduction in the maximum number of days at which default occurs is not reflective of the underlying risk fundamentals,” a spokesman said.
UK officials have not publicly weighed in on the issue so far and four consumer groups contacted about the change were either unaware of the issue or still learning about it.
EU officials said the default definitions in the capital requirements directive (CRD 4) would improve bank safety by making it easier for investors to compare them and allow regulators to impose uniform capital requirements.
“Our objective is to ensure consistency across the EU, and a level playing field for all financial institutions, which is not currently the case,” said a spokesman for Michel Barnier, the European Union internal markets commissioner.
David Strachan, a former regulator now with Deloitte, warned that other UK rules and customs may also have to change. “It’s an indication of maximum harmonisation. There’s more of that to come.”