Reserve Bank releases response to submissions on high-LVR restrictions
The Reserve Bank today released its response to submissions (PDF 245KB) following its public consultation on the framework for restrictions on high loan-to-value ratio (LVR) residential mortgage lending.
The Reserve Bank has also released a revised chapter of its Banking Supervision Handbook (BS19) (PDF 252KB) that sets out the draft conditions of registration that would apply in the event that LVR restrictions were introduced.
Deputy Governor Grant Spencer said LVR restrictions are one of four macro-prudential tools the Reserve Bank can use to manage financial system risks that can arise from asset price, credit or liquidity cycles. Use of the tools by the Reserve Bank was recently agreed in a memorandum of understanding with the Minister of Finance.
"LVR restrictions on residential mortgage lending can help to dampen excessive house price growth in periods when credit growth is boosting housing demand beyond housing supply," Mr Spencer said. "In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue.
"In situations where house prices are overvalued, the further that house prices rise, the more likely it is that a disruptive downward correction will occur. Such a correction would be very damaging if combined with a significant deterioration in economic or financial conditions."
Mr Spencer said that, as a result of feedback received during the consultation, the Bank was making some changes to the way it would implement LVR restrictions.
"High LVR restrictions would involve setting a limit on the proportion of new high-LVR lending that banks are able to do, rather than restricting it altogether. This ‘speed limit' approach would enable many high-LVR borrowers to continue to obtain mortgages.
"As we originally proposed, banks would be permitted to exempt a limited number of categories of high-LVR loans, when calculating their compliance with a specific speed limit. These include Housing New Zealand mortgage-insured loans, bridging loans, refinancing loans and high-LVR loans to borrowers who are moving home but not increasing their loan amount.
"Banks commonly issue mortgage borrowers with pre-approvals, which represent a firm commitment to provide housing finance and may be valid for up to six months. Some banks have indicated that they might be unable to meet a speed limit in the first few months of it being introduced due to the pipeline of pre-approved loans.
"To address this issue, we have decided that banks would initially be required to meet a speed limit on high LVR lending measured as an average rate over a six-month window. Thereafter, the speed limit for banks with lending in excess of $100 million per month would apply to the average rate over three-month windows, as originally proposed. However, we would expect the banks to modify their approach to issuing pre-approvals, in order to ensure that they fall within any speed limit on an ongoing basis.
"Banks with mortgage lending below $100 million per month will be required to meet the speed limit on the average high-LVR lending rate over six-month rolling windows, to reflect the greater volatility seen in their high-LVR mortgage lending.
"We have also clarified our intended treatment of branches of overseas banks operating in New Zealand. LVR restrictions would apply only to the New Zealand balance sheet of the registered bank and not the offshore branches of the international bank. However, the registered bank branch in New Zealand would be prohibited from assisting other parts of the international bank to write high LVR mortgage loans."
Mr Spencer said that if LVR restrictions are implemented, bank management and directors will be expected to follow the spirit, not just the letter of the restrictions.
"In particular, they will need to ensure that the policy is not avoided or undermined through innovative lending practices. We will be maintaining a close dialogue with the banks.
"As previously advised, the Reserve Bank would announce any decision to implement LVR restrictions at least two weeks in advance of the restrictions taking effect."
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