Intended changes to BS2A/B in respect of residential mortgage loans

Transcription

1 Intended changes: capital treatment of Intended changes to BS2A/B in respect of Changes to the definition of loan in BS2A/B Definition of loan: section 4.7 of BS2B and section 43(e) of BS2A. Residential loan means a loan secured by a first ranking over a property used primarily for purposes either by the mortgagor, or a related party of the mortgagor, or a tenant of the mortgagor. A loan may not be classified as a loan if the d property is predominately used for farming or commercial activities. Without limitation, a property will be considered to be predominately used for farming or commercial activity if: (i) the d property would be marketed as a farm or a commercial property; or (ii) the principal or interest payments are predominantly serviced from the income generated by the use of the property for farming or commercial activity, except where that income is rental income and the property is used for a purpose. For the purpose of this section, predominantly means more than 50 percent. From 1 July 2016, a loan must be classified as either a standard loan or a reverse loan. Prior to 1 July 2016, all are standard. The diagram below depicts the sub-classification of. Residential (RML) Standard RML Reverse RML Non property-investment RML Property-investment RML A standard loan written on or after 1 November 2015, and from 1 November 2016 a standard loan written before 1 November 2015, must be further subclassified into either a non property-investment loan or a property-investment loan. All written before 1 November 2015 are classified as non propertyinvestment until 31 October 2016.

2 2 A non property-investment loan is eligible for retail treatment irrespective of exposure size. A reverse loan may only be recognised in the loan category up to the value of the property used as security for the loan. Any excess of the loan over the property value is deducted from Tier 1 capital under section (7.3(o)/2.9(p)). The following definitions apply in respect of : non property-investment loan means a standard loan secured over only owner-occupied property. owner-occupied property means a property that meets the following criteria: (i) a natural person or related party of a natural person owns the property and one or other of these parties is the obligor under the loan; (ii) that natural person, or a related party of that natural person who falls within limb (c) of the definition of related party in this section, intends to occupy the property either as their principal or secondary residence (a secondary residence includes holiday homes or a second home where the natural person or related party spends significant time); and (iii) in respect of a secondary residence, no rental income is derived from that property, except to the extent that the rental income is minimal (e.g. a bach rented out for six weeks a year). property-investment loan means a standard loan that is not a non property-investment loan. related party for the purposes of section [4.7/43] means a person (A) that is related to another person (B) in one of the following ways: (a) A is the trustee of a trust and B is a beneficiary of the trust; (b) A is a company or unincorporated entity and B is a shareholder of, or otherwise controls, A; (c) A is the spouse, civil union or de facto partner of B; or (d) A is the estate of the spouse, civil union or de facto partner of B. reverse loan means a loan for which payments of principal or interest are not due in accordance with an agreed repayment schedule but rather on the occurrence of a specified trigger event, in which case the repayment of the loan is made from the proceeds of sale of the property. standard loan means a loan that is not a reverse loan.

3 3 Changes to definitions relevant to Section 4.150A of BS2B (equivalent changes will be made to 37 and 43 of BS2A) Changes are indicated with tracked change format. The loan-to-valuation ratio (LVR) for a loan is calculated by the formula: LVR = loan value/property value x 100 In the formula loan value is the total amount of: Deleted:, as at balance date, (i) (ii) All claims secured by way of first ranking over property; The EAD amount of any off balance sheet exposures secured by way of first ranking over property and consistent with sections to Deleted: the Deleted: the Lending facilities that are not tied to nor managed as part of the loan and that are not normally treated as secured over the property, such as credit cards or personal, do not need to be included in the LVR calculation. property value (i) (ii) for a standard loan or a reverse loan at the time of origination, is the total value of the property that is security for the loan determined under a bank s property valuation policy when a loan is originated and, for a reverse loan, must be updated every three years, and at that time is given by the formula: property value = { Max (V o, 80% x V R ) if V R > V o or { V R if V R V o Deleted: where V o is the total value of the property that is security for the loan determined under a bank s property valuation policy at the time the loan is originated, and V R is the total value determined at the most recent three-yearly update determined under the bank s property valuation policy. property valuation policy means.. [retain existing text and add at the end]: for reverse requires that the property value is updated three-yearly. Delete from BS2A: independent valuer means a person who is not associated with a person who has an interest in the property for which a valuation is made and who is: Deleted: On and after 1 October 2014, Deleted: on a before 30 September 2014 means a policy governing how a property value is determined for a loan that (i) a registered valuer as defined in the Valuers Act 1948;

4 4 (ii) (iii) another person approved to provide valuation services by rules made under the Ratings Valuation Act 1998, or a person who meets the definition of valuer under the laws of another country, provided that the Reserve Bank has confirmed in writing to the registered bank that it considers the law of the other country to be at least as satisfactory as the requirements under the Valuers Act No change to definition of professional valuation service. Calibration The following calibrations will apply in BS2B A For the purpose of section Correlation (R) is determined by the loan-to-value (LVR) of the loan in accordance with Table 4.11A. Deleted:, on or after 30 September 2013, Table 4.11A Correlation for LVR Correlation (R) Non property-investment loan Correlation (R) Property-investment loan 90% and over % Under 80% Delete unnecessary sections: 4.164B/4.164C Table 4.11 Minimum LGD for LVR LGD Non property-investment loan LGD Property-investment loan 90% and over 38% 40% 80-89% 33.25% 35.5% 70 79% 28.5% 31% 60-69% 19% 21.5% Under 60% 10% 12.5% Deleted: - 100%

5 to the extent that exposures are secured by real estate the LGDs corresponding to different LVRs set out in table 4.11 (column 3) must be used unless the bank has the consent of the Reserve Bank to use its own LGD estimates. The following calibrations will apply in BS2A and the final column applies for reverse s in BS2B The following risk weights are intended to apply to standard and reverse under BS2A and to reverse s under BS2B (that is a standardised approach will apply to this asset class in BS2B). Table 4.xx: Risk weights for that are not 90 days past due Loan-tovalue ratio Does not exceed 80 % 81 to 90 % 91 to 100% Exceeds 100% If there is lender s insurance that qualifies under section 38 Non propertyinvestment Risk weight in % Propertyinvestment If there is no lender s insurance or lender s insurance that does not qualify under section 38 Non propertyinvestment Propertyinvestment Risk weight for reverse loan (%) LVR Does not exceed 60% 50 LVR > 60% and < 80 80% LVR > 80% 100 Deductions from Tier 1 capital 7(3)(o)/2.9(p) the amount to which the loan value of a reverse loan exceeds the value of the security for the loan that is property.

6 6