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Monday, UK's financial regulator has proposed a series of measures to reform the mortgage market to help consumers and make the market sustainable for all participants.
The Financial Services Authority said it plans to impose affordability tests for all mortgages, whereby lenders would be responsible for assessing the consumer's ability to pay. Also, the regulator seeks to ban 'self-certification' mortgages, through required verification of borrowers' income.
Further, the FSA plans to ban arrear charges on consumers who are already repaying, thereby ensuring that firms do not profit from people in arrears. The authority is also seeking a ban on the sale of products that contain a certain element of 'toxic combinations' of characteristics that put borrowers at risk.
According to the regulator, its intrusive and interventionist style of regulation also include making all mortgage advisers personally accountable to it. Moreover, the FSA said it seeks to extend its scope to cover buy-to-let and all lending secured on a home. Consumer groups and industry can comment on the proposals until January 30, 2010. A feedback statement will be published in March and the implementation will be phased, with the focus on speed for areas of high detriment such as arrears.
"The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress," Jon Pain, FSA managing director of supervision said. "The FSA needs to ensure that firms only lend to people who can afford to pay the money back."
The financial watchdog noted that the irresponsible round of lending seen until recently would now be curtailed by its current regulatory work on capital and liquidity. Earlier this month, the FSA introduced tighter liquidity requirements for firms. The regulator had indicated that precise volume of liquidity that each firm will need to hold would be refined over a period of time to ensure that the combined impact of higher capital and liquidity standards is proportionate. Further, it said the qualitative aspects of the regime would be put into place by December.
Meanwhile, the FSA said it would not rule out further changes to the proposals, including caps on loan-to-value, loan-to-income or debt-to-income, if the initial proposals had no desired effect. Elsewhere, FSA Chief Executive Officer Hector Sants told BBC's Radio 4 that people who got home loans in the boom should not be getting them under the new rules. A new approach to regulation is needed, he said.
The Council of Mortgage Lenders welcomed the publication of today's Mortgage Market Review discussion paper and said it is well thought out and logical. But, the trade association added that 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".
Commenting on the review, the British Bankers Association said, "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."
According to Paul Broadhead, Head of Mortgage Policy at the Building Societies Association, the vast majority of the British population aspire to home ownership and these proposals must not frustrate the sensible ambitions of potential homeowners. There must be a sensible balance between appropriate regulation and allowing people to buy their own home when they can afford to do so, he said. We are pleased that the FSA is not setting maximum loan to income or loan to value ratios, said Broadhead.
Also on Monday, survey data showed that housing market activity is gaining strength. Data released by the property website Rightmove showed an annual increase of 0.2% in house prices in October after a 1.5% decline in September. That was the first increase in fifteen months, led by a strong recovery in London. The average property asking price totaled GBP 230,184 in October.
Mortgage approvals in August stood at 52,317, slightly down from 52,404 approved in July, central bank data had shown last month. Total net lending to individuals rose GBP 0.7 billion in August, of which net lending secured on dwellings rose GBP 1 billion.
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