FSA to ban self-certification mortgages

Lord Turner, the chairman of the Financial Services Authority, yesterday said the watchdog would press ahead with plans to ban self-certification mortgages as he unveiled research showing that an alarming 46 per cent of households have no money left – or even a shortfall – after paying their mortgages and living costs.

Lord Turner told the British Bankers' Association's annual conference that banks will in future have to conduct an "affordability test" on every mortgage they sell to address a looming crisis in the market.

Signalling what he called a "major change of approach" to the mortgage market – which will be taken forward by the new Consumer Protection and Markets Authority – he also warned that 30 per cent of mortgages are now "interest only" with many having no repayment vehicle attached. This, he said, is too many.

"For consumer protection as well as prudential reasons – we are proposing to significantly strengthen the requirement for lenders to assess affordability, to ensure that the borrower is likely to be able to repay the loan," he said

Self-certification mortgages are typically taken out by the self-employed and people who have difficulty proving their income. They have been linked to an unusually high level of arrears.

Lord Turner continued: "We propose that income verification should be required in every case. This reflects the fact that self-certified loans incurred arrears rates three times higher than those where income was verified, and that, for some lenders, though not all, fast-track mortgages also performed badly."

He said that banks could actually welcome the change because it would reduce the "unacceptably high levels of fraud in the mortgage market".

Lord Turner added: "We also plan to require that affordability requirements for credit impaired customers incorporate an extra buffer for caution, again reflecting the facts, in this case that credit impaired customers had arrears rates five times higher than non-credit impaired."

Despite the crackdown, the watchdog stopped short of banning high loan-to-value mortgages – or 100 per cent mortgages. Lord Turner said there was some correlation of this and mortgages' failure, but he said the FSA had decided that affordability was the key test on which to judge mortgage sales. Lord Turner insisted that the FSA still did not wish to be a "price regulator" but would be reviewing the industry's economics much more closely in future.