FSA looks at mortgages and actually does something sensible?
Industry regulators never have an easy time of it. They have to walk a finely balanced line between over-regulation and letting the industry do as it pleases. Few regulators get it right all the time, and many struggle to manage any of the time. Now, one such regulator, the Financial Services Authority (FSA) has announced that it will be introducing new mortgage lending rules to prevent a return of the risky business* seen in boom times. The new rules will be drawn up after consultation “ensuring that common sense standards continue to apply in future”.
The fresh-off-the-press Mortgage Market Review aims to prevent a recurrence of the irresponsible lending which resulted in many borrowers ending up struggling to repay their mortgage and in danger of losing their home. The review contains a number of proposals, drawn up after detailed feedback from lenders, consumer groups and other stakeholders, and the FSA is now encouraging consumers, industry and all other interested parties to give their opinions on this new, full, set of proposals.
The FSA think that the proposals will see prospective borrowers - whether they are first time buyers, right-to-buy tenants or home movers - get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant's realistic ability to repay their mortgage. Call me cynical, but surely this is just common sense, and should have been how things were done anyway.
Following consultation, the FSA Board will make a final decision on the rules in summer 2012, but implementation will not be before 2013.
The main thrust of the proposals are “three principles of good mortgage underwriting”:
- Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
- This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever; and:
- Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.
Key features of the proposed future regime include:
- Income will have to be verified in every mortgage application;
- Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax;
- Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough;
- Lenders will have to consider the impact of increases in interest rates in line with current market expectations;
- Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs;
Existing borrowers who already have a loan that might be forbidden under the new rules, such as an interest-only loan, a self-certified one, or one with a very small deposit, will not be prevented from remortgaging.
"Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements," said the FSA, confirming, "we will allow lenders to waive the affordability rules when entering a new mortgage contract - providing the borrower has a good repayment history."
Paul Broadhead of the Building Societies Association said: "The original proposals were in danger of locking credit-worthy borrowers out of the market or imprisoning those with immaculate payment records, but non-standard profiles, in their current homes and loans… which is good news for the self-employed, those in existing self-certified mortgages and people with negative equity."
Paul Smee, director general of the Council of Mortgage Lenders said the new version of the FSA's rules was "workable and appropriate", saying "the FSA's new proposals seem to strike broadly the right balance." Gosh. He thinks common sense is, well, common sense. Wonders will never cease.
Lord Turner, chairman of the FSA, said: "The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders. We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past - leaving most borrowers unaffected, but better protected."
That the proposals are blindingly obvious and something you would have expected responsible lenders to do anyway is a given; however it remains to be seen whether this means that self-employed and “non-standard” borrowers get frozen out of the new market. The consultation is open until 30 March 2012.
*Tom Cruise is, unfortunately, not in the FSA, although he is in Risky Business.