FSA 'stress tests' would ban half of all mortgages, warn lenders
About half of the eight million mortgages approved in the past five years would have been banned under the tougher affordability rules proposed by the Financial Services Authority (FSA), a study suggests.
Research published today by the Council of Mortgage Lenders (CML) will also say that 3.8 million of those loans have "performed" throughout the financial crisis and recession, with just 200,000 having defaulted. It comes at a time of mounting concern about the state of the housing market, with mortgage approvals running at close to historic lows and widespread predictions of a fresh collapse.
There was further evidence of that yesterday as a poll of purchasing managers in the construction industry showed a sharp fall in residential housebuilding. The survey, compiled by Markit and the Chartered Institute of Purchasing and Supply (CIPS), produced a reading of 45.4. Any reading below 50 indicates that activity is contracting.
The Markit/CIPS figure is the lowest since July 2009 and the first contraction in a year. The headline reading of 53.8, which was slightly above August's result of 52.1, shows that activity in other sectors is rising. Significantly, however, confidence hit an 18-month low. The report says much of the apparently good news resulted from an "11th-hour spending spree" by the previous Labour government.
Michael Coogan, director-general of the CML, said he feared the effect of the FSA's crackdown had been underestimated. "It is not possible to quantify the precise effect on future business but it does suggest the impact is likely to be higher than the regulator has yet acknowledged," he added.
"More borrowers would be protected from possible arrears and the risk of possession, but a substantially higher number of mortgages taken out between the second quarter of 2005 and the first quarter of 2009, which have shown no signs of payment difficulty, would not have been granted if the FSA's affordability approach had been in place."
Mr Coogan said the CML's research simulated the impact of the FSA's proposed changes to how mortgages were sold, based on data from recent years. The watchdog wants to force lenders to undertake far more detailed "affordability" tests before approving loans. They would have to consider a client's income and expenditure and assess each mortgage application as if it were a repayment mortgage, even if some or all of the loan was advanced on an interest-only basis.
Lenders would also have to look at a borrower's ability to repay over 25 years, even if the proposed loan was advanced over a longer term. They would have to apply an "interest rate stress test" to check that a loan would still be manageable if interest rates rose sharply. Lenders would also have to apply a "buffer" to people with poor credit histories, reducing their incomes by 20 per cent for the purposes of the affordability tests.
Industry experts fear that the FSA's proposals could take out of the property market thousands of first-time buyers – the people who are essential for it to work effectively.
Significantly, the CML study did not take into account all of the FSA's ideas, such as demanding that lenders also consider changes in a borrower's circumstances. This could further reduce the number of buyers able to obtain a mortgage.
Last night, the FSA defended its plans, saying they were designed to address "major failures that have occurred in the mortgage market". A spokeswoman added: "We are actively consulting all stakeholders to ensure we get the right solution. Our evidence shows that 16 per cent of borrowers are already financially overstretched and facing problems now as a result of their lenders' practices in the past.
"For now, borrowers are also benefiting from historically low interest rates and house price inflation, which cannot go on forever."
The FSA insisted it was "imperative that we take steps to protect vulnerable consumers and ensure lenders are making responsible decisions". "We will continue to work ... to establish a strong mortgage market where those who can afford mortgages are able to get them," it said. "It is in the interests of all that we get this right: both lenders and borrowers suffer from irresponsible lending."
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