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Mortgage affordability test plan Mortgage affordability test plan
(20 minutes later)
Borrowers face a mortgage affordability test from lenders amid plans by the Financial Services Authority (FSA) to step up the regulation of home loans.Borrowers face a mortgage affordability test from lenders amid 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.Self-certification mortgages will be banned under the proposals with lenders required to verify borrowers' incomes.
FSA chief executive Hector Sants said that some people who were able to get home loans in the boom would no longer be able to under the proposed rules.FSA chief executive Hector Sants 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 will have until 30 January 2010 to comment on the plans.The industry will have until 30 January 2010 to comment on the plans.
The FSA, in its mortgage market review, has outlined a series of proposals for increasing regulation in the mortgage market.The FSA, in its mortgage market review, has outlined a series of proposals for increasing regulation in the mortgage market.
However, it drew back from any ban on 100% mortgages, or any limit on loan-to-value levels. The was also no ban on loans over a certain multiple of borrowers' incomes.However, it drew back from any ban on 100% mortgages, or any limit on loan-to-value levels. The 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:The plans, which the FSA described as more "intrusive and interventionist", include:
  • Making lenders ultimately responsible for assessing consumers' ability to pay
  • Banning the sale of "toxic combination" loans, such as a high loan-to-value loan for somebody with a poor credit history
  • Stopping arrears charges for borrowers who have got behind on payments, but are paying
  • Extending policing of the industry by the FSA to all mortgage advisers and arrangers.
  • Making lenders ultimately responsible for assessing consumers' ability to pay by studying borrower's 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 arrears charges for borrowers who have got behind on payments, but are paying
  • Extending policing of the industry by the FSA to all mortgage advisers and arrangers.
"We need a new approach to regulation," Mr Sants told the BBC."We need a new approach to regulation," Mr Sants told the BBC.
He said that the irresponsibility of the past that put firms and consumers at risk should not be repeated.He said that the irresponsibility of the past that put firms and consumers at risk should not be repeated.
"In the past, the prevailing regulatory philosophy was definitely based on the notion that banks would behave properly and not put themselves at risk and not put consumers at risk," he said.
"I think we just have to recognise that both firms and indeed consumers just don't always make the best decisions. They don't always act in their their best interest or indeed in the best collective interest of society. So we need a new approach to regulation."
Ban plan
The most striking proposal is the ban on self-certification mortgages - the type with which customers do not have to prove their income.
It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of 'irresponsible lending' Council of Mortgage Lenders
These loans made up a half of all the mortgages being offered during the years of the housing boom, but have been at the centre of a number of mortgage fraud inquiries, when incomes were inflated by rogue brokers looking for higher commissions.
The FSA'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.
"That is a level of complexity we could well do without," Mr Sants said.
He said that proper consideration was needed by lenders as to how much a borrower could afford, in what was often the most important financial decision of a borrower's life.
The UK mortgage market has recently started to pick up slightly after dropping sharply during late 2008 and early 2009.
The Council of Mortgage Lenders (CML) described the FSA review as "well thought out and logical", but described some of the political comment surrounding lending as more "rabble-rousing" than considered debate.
"It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of 'irresponsible lending'," the CML said.