Cautious welcome for tougher mortgage rules

Nicky Burridge
Monday 19 October 2009 11:31 BST

The City watchdog's proposals for the mortgage market received a cautious welcome from the industry today.

But trade bodies expressed concerns about how some of the Financial Services Authority's (FSA) measures would be implemented, as well as the impact a ban on self-certification mortgages would have on certain borrowers.

Paul Broadhead, head of mortgage policy at the Building Societies Association, said: "While much of the detail in the paper is sensible, we have significant reservations about the possible unintended consequences of some of the ideas expressed.

"We need a sensible balance between appropriate regulation and allowing people to buy their own home when they can afford to do so."

He welcomed the fact that the FSA was not imposing caps on loan to value and loan to income ratios, but instead focusing on borrowers' levels of disposable income, although he expressed concern about how the FSA would implement the change.

He said: "We believe that homeownership is something that should be encouraged, and it is vital that lenders retain the flexibility to respond to the very individual financial circumstances of individual borrowers.

He added that self-certification mortgages were a niche product that should never have had a market share of 45%, but he warned that they were suitable for a minority of people, and an outright ban was "not appropriate".

The Council of Mortgage Lenders said the discussion paper was well thought out and logical.

But it said the FSA seemed to believe that regulation could not rely on borrowers behaving in their own interests, but that consumers instead needed measures to be introduced to protect them from themselves.

It said: "It is important that the principle of consumer responsibility is not lost in such a regulatory environment, as it is a basic tenet upon which transactions of all kinds between firms and consumers rely."

Housing charity Shelter called on the FSA to implement the changes it was proposing urgently to ensure the "dark days of reckless lending never return".

Kay Boycott, the charity's director of policy and campaigns, said: "Every day Shelter's mortgage counsellors see the misery of homeowners who have fallen into arrears or are being repossessed because lenders have handed out mortgages they couldn't afford.

"The housing charity has released new research showing banks are still offering unaffordable mortgages that would leave borrowers with living costs of just £53 a month over the minimum income standard for a single working male, as calculated by the Joseph Rowntree Foundation."

The group also welcomed plans to regulate the buy-to-let market.

Ms Boycott said: "We have seen many buy-to-let landlords borrow excessively, believing they'll make quick profits.

"But when these amateur landlords hit financial difficulties it's their innocent tenants who face eviction and homelessness."

Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said: "Although the FSA admits to some of its own errors, it is playing to the gallery by heaping blame on non-banks and non-income verified lending as being at the centre of the market's problem.

"This is too simple an argument. Non-banks weren't the dominant lenders in the markets in which they operated and non-income verification lending was underpinned by credit scoring systems.

"Non-banks play an important role in the UK mortgage market and a regulatory environment which makes it difficult for them to compete will only be detrimental for consumers and for innovation in the marketplace."

The Finance & Leasing Association criticised the FSA for suggesting the market for second charge mortgages, under which people take out loans secured against their home, was not adequately regulated under the Office of Fair Trading.

Fiona Hoyle, head of consumer finance at the Finance & Leasing Association, said: "This is not the case and there is no evidence that consumers' rights are not adequately protected under the Consumer Credit Act.

"Based on these facts, shifting the regulatory control of second charge mortgages from the Office of Fair Trading to the Financial Services Authority would be using a sledgehammer to crack a nut.

"However, if the decision is taken to transfer responsibility to the FSA, we want a smooth transition, minimum disruption for customers and no loss of the consumer protection they benefit from under the current regime."

Andrew Montlake, of mortgage brokers Coreco, said: "The proposed ban on self-certification mortgages needs to be clearly thought through.

"Let's not forget why self-certification was introduced in the first place - to help the thousands of responsible, self-employed people, with irregular income, who can clearly afford the loan but have issues ticking the traditional boxes.

"It is easy to get carried away with regulation after the horse has bolted, but when used properly through approved brokers, backed up with sensible checks, there can be a place for self-certification."

The British Bankers' Association said: "When they offer mortgages, the UK's high street banks pay particular attention to their affordability for each individual customer, considering a range of factors which is not limited to salary multiples or loan-to-value ratios.

"Therefore the banks welcome the FSA's similar emphasis in this paper on the overall affordability of the mortgage for the customer, and their focus on mortgage broking activity and higher-risk lending.

"It should be a firm principle of mortgage regulation that higher-risk borrowers such as self-employed people and first-time buyers are not effectively cut out of the market.

"The issue that faces all of us - lenders, borrowers and regulators - is ensuring the risk of taking out a mortgage can be shared effectively. Any new rules must not serve to create unreasonable obstacles either for lenders or for borrowers."

Sue Edwards, head of consumer policy at Citizens Advice, said: "Stricter tests to ascertain consumers' ability to afford a mortgage, banning the sale of mortgage products that put consumers at risk and, in particular, a ban on arrears charges when borrowers are already repaying should ensure enhanced protection for borrowers which is long overdue.

"Citizens Advice would like assurance that the measures requiring mortgage advisers to be personally accountable to the FSA will work in practice.

"We would also like to see uniform consumer protection for all secured lending and for the FSA's scope to cover this, as well as lending secured on a home."

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