New capital rules will drive U.S. banks away from any sort of exotic lending products, says a new report from Fitch Ratings.
The rating agency said Wednesday that proposed U.S. regulations to implement Basel III capital requirements for residential mortgage lending could both increase borrowing costs for “plain vanilla” mortgage products, and may effectively eliminate non-traditional mortgages, which are viewed as high risk by regulators.
If adopted, proposed U.S. rules could “ultimately push banks away from all but the most conventional and low risk forms of mortgage lending,” it says.
Fitch reports that non-traditional products, such as loans amortizing over more than 30 years, negative amortization mortgages, and loans lacking verification of a borrower’s ability to repay, would all require banks to hold two to three times more capital than than they do under the current rules. It would also require them to hold some capital for warranties on loans that have been sold.
Between this proposed rule, and other regulatory reforms, Fitch says the effect will be to “sharply curtail the ability and willingness of banks to underwrite or purchase loans that regulators view as high risk.”
Ultimately, it believes that banks will continue to meet demand for traditional loan products, passing along the additional cost of capital to borrowers. However, a reluctance to originate, or sell, significant volumes of non-traditional mortgage products, will reduce the availability of credit to many borrowers, it concludes.