Greater regulation of the UK mortage market is in sight
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.
