BoE fears coatings crisis poses risk to UK financial stability

The Bank of England is increasingly concerned about the impact of the coatings crisis on financial stability and has pressured lenders to audit their exposure to homes that may be unsalable, according to three people with knowledge of the situation.

The Prudential Regulation Authority, the BoE’s body responsible for overseeing banks, believes the government has yet to grasp the scale of the coatings crisis and expects costs to mortgage lenders to be higher. important than those described so far, people said.

PRA credit risk specialists “are studying the financial stability implications of the fire safety issue,” one of the people said. The PRA declined to comment.

Owners of properties with potentially hazardous siding now face huge bills, whether for fault repair work or for maintaining temporary fire safety measures such as round-the-clock patrols of buildings. Until this work is fully costed or completed, appraisers cannot assess the value of a property, preventing lenders from issuing mortgages on those homes.

The government has created a building security fund, but that fails to cover much of the costs associated with the crisis, leaving individual tenants in charge of tens of thousands of pounds.

If a large number of tenants are forced to pay for expensive fire safety work, it will increase their ability to make their mortgage payments and could trigger a wave of defaults. Ultimately, their apartments could fall into the hands of lenders. But without costly repairs, these properties would effectively remain worthless and difficult to sell.

The PRA’s concerns had been fueled by the fact that “bills have started to come in” for repair work, said one familiar with the body’s thinking. “It impressed them that this [cost] represents a much higher share of the overall property value than the government anticipated, ”she said.

The PRA has urged mortgage lenders, including Lloyds and Nationwide, to conduct thorough audits of their loan portfolios to determine capital at risk from the crisis, according to the three people familiar with PRA thinking.

Both lenders increased their provisions to cover potential costs resulting from the building safety crisis earlier this year.

The Grenfell Tower fire in 2017 raised concerns about the safety of building cladding, in which 72 people died. At first, high-rise towers clad in similar materials at Grenfell came under scrutiny, but the scale of the crisis widened in January last year when ministers said the Multi-storey and multi-use residential buildings of any height should be assessed for fire risk, resulting in over 800,000 additional apartments across the UK.

The ministers’ latest attempt to break the deadlock was to withdraw this notice and replace it with a new standard, in the hopes that this would allow lenders to issue mortgages on homes less than 60 feet tall. . The new government guidelines also aim to prevent tenants from paying for security work on low-risk buildings.

But surveyors opposed the plans, adding to the evidence that the intervention would not be the quick fix the government had hoped for.

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