As part of the much vaunted (and much needed) drive to bring greater accountability and responsibility to the UK mortgage market, borrowers will now face a mortgage affordability test from lenders as part of plans by the Financial Services Authority (FSA) to step up the regulation of home loans.  

Self-certification mortgages will be banned under the proposals with lenders required to verify borrowers’ incomes. The FSA has said that some people who were able to get home loans in the boom would no longer be able to under the proposed rules.  

The industry has until 30 January 2010 to comment on the plans.  

The FSA’s mortgage market review outlines a series of proposals for increasing regulation in the mortgage market. All borrowers will have to show they have sufficient spare income to finance the repayment of their new home loans.  

However, the FSA drew back from any ban on 100% mortgages, or any limit on loan-to-value levels. There was also no ban on loans over a certain multiple of borrowers’ incomes. However, it did not rule out such caps in the future, if the initial proposals failed to have a sufficient effect.  

The plans, which the FSA described as more “intrusive and interventionist”, include: Making lenders ultimately responsible for assessing consumers’ ability to pay by studying borrowers’ monthly disposable income, banning the sale of “toxic combination” loans, such as a high loan-to-value loan for somebody with a poor credit history, stopping charges for borrowers who have got behind on payments, but are keeping to an arrangement to repay these arrears and, finally, extending the policing of the industry by the FSA to all mortgage advisers and arrangers.  

The FSA has said that the irresponsibility of the past that put firms and consumers at risk should not be repeated.  

The most striking proposal is the ban on self-certification mortgages, the type where customers do not have to prove their income, as these have been associated with a disproportionately high number of arrears and repossessions.  

When the FSA first took over the regulation of mortgage selling in October 2004, it proposed that borrowers who were not self-employed should not be allowed to self-certify their incomes. The mortgage industry lobbied against that idea and the FSA relented.  

These loans made up nearly half of all the mortgages being offered at the peak of the housing boom, but have been at the centre of a number of mortgage fraud inquiries, when incomes were allegedly inflated by rogue brokers looking for higher commissions.  

This led them to be dubbed “liar loans” by some commentators.  

If the ban now comes in, lenders will be able to look at the tax returns of self-employed people, who have often used self-certification loans, for evidence of their income, the FSA said.  

The regulator’s review came after the mortgage market mushroomed during the housing boom, with some 10,000 different mortgage products available at one point in 2007. Of these, 3,000 were specifically aimed at sub-prime borrowers, those who have inferior credit records.  

Residential mortgage debt in the UK amounts to around £1.23 trillion, accounting for approximately 70% of all credit extended by lenders in the UK, the regulator said.  

The FSA also wants the power to regulate buy-to-let mortgages, which are generally treated as business loans, and so currently fall outside the FSA’s scope.

Almost every week there is a new survey about the UK housing market and this blog often discusses the information they contain. This week, however, rather than simply discuss another survey I shall discuss the firms behind the surveys, why they do it and what the data means. 

The most recent survey to be launched, and which has also become the most authoritative, is from the Land Registry, which records all completed property sales in England & Wales. It now publishes a monthly report on house prices in addition to its quarterly survey but it has been recording the price of all property sales since April 2000.  

Of the more than seven million sales since then, 1.4 million have involved the same house being sold again. The Land Registry uses something called Repeat Sales Regression to measure the change in prices over time. In essence, this means it is comparing the price of properties sold now with the price paid when it was sold before.  

The proceeds of all the transactions are totted up, and then divided by the total number of sales to reach an average sale price. However, repossessions and property transfers following a divorce are excluded to avoid skewing the sample.  

Because it takes virtually all residential property sales into account, the Land Registry’s figures can provide a unique insight into not only national but local prices. In fact, the Registry can provide an accurate picture of prices down to postcode level. However, since the survey comes out only once every three months, the figures are out of date by the time they are published.  

The government has its own monthly house price index, issued by the Department for Communities and Local Government (DCLG). It uses lending information from about fifty lenders, which is collected through the Survey of Mortgage Lenders.  

Unlike the Land Registry survey the new government index does not contain information on cash purchases, which account for about a quarter of the market and another drawback is that it is not very timely. It only appears two months in arrears.  

But the survey offers indexes for the whole UK, the major regions and one for first-time buyers. Unlike the Nationwide and Halifax surveys which are weighted according to transactions, the new survey depends much more on the total amount of money spent. Relying on expenditure in this way will mean that London and the South East, where house prices are highest, will have a greater influence on the government’s index.  

Perhaps the best known snapshots of the property market are provided by Britain’s two biggest mortgage lenders, Nationwide and Halifax. These surveys feature extensively on this blog. Both surveys cover the entire UK, rather than just England and
Wales.  

Their figures are often very similar, as they are both based on the price agreed after a survey by their mortgage customers. However, like the new government survey, they are based only on property sales financed by mortgage lending, ignoring sales which are transacted on a cash basis.  

The Royal Institution of Chartered Surveyors (RICS) survey reflects confidence in the property market rather than what is actually happening to house prices. Three hundred surveyors and estate agents in
England & Wales are asked if they feel prices are falling or rising.  

Respondents are also quizzed on a host of other related issues, such as whether the number of buyers and sellers are rising or falling. Generally speaking, the RICS survey is the first to show any sea change in the market. Because each of these reports are conducted using different methodology and at different times the reports that come out often have very different, even contradictory results. This is especially the case when the UK housing market is in a volatile state as it is now on the back of a shaky economy. They are, nevertheless, useful, in building a picture of the housing market for professional analysts and consumers alike.