Series on COVID-19 and RegTech: Mortgage Holidays

In this instalment of our Series on COVID-19 and RegTech, we are considering mortgage holidays and their regulatory treatment. On 17 March 2020, the UK Chancellor of the Exchequer announced 3 months holidays on mortgage repayments to help consumers. On 22 May 2020, the Prudential Regulation Authority (PRA) issued a statement that shows flexibility in the regulatory definition of defaults during COVID-19. Combined, these two steps are important policy developments in the economic recovery from COVID-19. When lockdowns hit, consumers around the country experienced reductions in their income or lost their livelihoods over night as they were furloughed or laid off. Mass defaults on mortgages became an imminent threat to the financial system. What do the mortgage holidays mean for financial institutions?
Financial institutions have to hold capital against their loans to offset the risk of borrowers defaulting on their loan repayments. Because borrowers’ income dropped as a result of COVID-19, the risk of defaults on loan repayments increased. Lenders are correspondingly required to hold more capital against the riskier loans. Giving borrowers a holiday on their repayments mitigates the risk of a sudden surge in defaults on mortgage repayments. Both financial institutions and borrowers alike benefit. How are financial institutions supposed to treat mortgage repayments once the holidays of 3 months come to an end? Enter the PRA and its announcement on the regulatory treatment of defaults.

In its statement, the PRA addresses concerns over continued issues with repayments following the end of the repayment holidays. The PRA advised that the failure to make repayment because of temporary issues should be distinguished from more long-term factors. A borrower on furlough may have experienced a temporary reduction in their income leaving them incapable of making full mortgage repayments. Because the furlough scheme and other support measures are temporary, these borrowers are likely to return to their full income before long. They present a lower risk and less capital will have to be held against their mortgages. Borrowers who lost their jobs are likely to struggle for longer. Mortgages for these borrowers may have to be restructured to reduce repayment obligations. This would constitute a default on the mortgages and require higher capital holdings for financial institutions. Why is this announcement so important?

The PRA’s agility during these troubling times is commendable. Financial institutions are essential for supporting the economic recovery. Lending must continue to ensure there is sufficient money in the economy to drive the economic recovery. Flexibility in the regulatory treatment of mortgage holidays and borrowers’ repayment obligations ensures that financial institutions and borrowers do not suffer unnecessarily. For financial institutions continuing to lend, accurate, reliable data is essential to evaluate the consequences of these regulatory developments.

RegTech solutions like Suade can provide assistance through regulatory reporting under C07. C07 calculates the credit risk of mortgages and other assets. While the PRA’s agility is important to the health of the financial system, evaluating mortgage holidays effectively is equally important. RegTech solutions like Suade’s offer a fast and accurate means of calculating credit risk on mortgages. For capital calculations, Suade helped its clients adjust their treatment of mortgage repayments to take into account a holiday of 3 months. Payments to maturity were simply delayed by 3 months. Suade clients were quickly able to calculate the impact of mortgage holidays to evaluate their capital holdings. The Suade RegTech solution has helped lenders navigate COVID-19.

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