19 Dec 2011

FSA to crack down on ‘irresponsible’ mortgages

The financial regulator is unveiling new rules for banks on approving mortgages to make sure customers are not able to borrow more than they can afford.

These include verifying income for every mortgage application and making sure banks consider bills and regular outgoings.

The FSA‘s mortgage market review said that loans should only be approved where there is an expectation that it can be repaid without having to rely on “uncertain” house price rises in the future.

While low interest rates have helped some borrowers, the regulator found that they disguise problems that are being stored away for when rates start to rise.

The FSA said it hoped that new rules, which come into effect in 2013, will prevent the “poor lending” – based on an assumption that house prices will always rise – that led to the financial crisis.

Around 15 per cent of borrowers who took out mortgages between 2005 and 2010 could be in negative equity, say the FSA.

The report read: “While risky, lower-quality lending may currently be restricted, there is a real danger that, as funding comes back into the market and lending starts to pick up again, there will be increasing pressure on firms to consider higher-risk lending and focus more on market share than maintaining lending standards.”

The new rules will also result in the end of self-certification mortgages, which are often used by self-employed mortgage applicants who declare their own earnings, as well as a decline of “fast-tracked” mortgages, where income verification is not always required.

Reckless lending can lead to ‘misery’

Andrew Baddeley-Chappell, head of mortgage strategy and development for the Nationwide said: “The current mortgage market is fragile and growth is relatively weak.

“With this in mind, we question whether now is the right time to ask the industry to divert its focus onto further regulatory changes.”

But Campbell Robb, chief executive of the housing charity Shelter, said: “Unaffordable, reckless lending caused misery to thousands of homeowners who ended up falling behind on mortgages they had no hope of paying back, leaving them to face eviction and homelessness.

“We are very pleased the FSA are committed to greater mortgage regulation, including income checks and affordability tests, which are both much needed and long overdue.”

Bernard Clarke, a spokesman for the Council for Mortgage Lenders, said that since the financial crisis banks have been lending more responsibly. “Many of the regulations they propose to implement are about ensuring that this continues when we go back to more buoyant market conditions.”

David Hollingworth, associate director of the mortgage broker London and Country, said: “The market reacted ahead of time. Lenders are far more risk adverse now. What this does is lay down a framework to prevent a change from that approach when market conditions improve.”

He also welcomed how the FSA’s approach will offer lenders the flexibility to provide new mortgages to some existing customers even where they do not meet these affordability requirements, providing their loan and repayment levels do not rise.

“I hope this approach will hold back some of the worst excesses of the market while allowing some flexibility,” he added.