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Monday, UK's financial regulator has proposed to put in place major reforms in the mortgage market that would be beneficial for consumers and make the market sustainable for all participants.
The Financial Services Authority said it plans to impose affordablity 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.
The watchdog also called for all mortgage advisers to be 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.
"The proposals reflect the FSA's changed approach to a more intrusive and interventionist style of regulation," the regulator said in a statement.
"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 FSA 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 financial regulator 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.
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