Never again?

Posted by: Jules Birch

19/10/2009

Top marks to the Financial Services Authority (FSA) for resisting the temptation to allow a return to business as usual in the mortgage market.

In a discussion paper published this morning, the regulator proposed a range of measures that in effect will save borrowers and lenders from themselves. They include:

• affordability tests for all mortgages that make lenders ultimately responsible for assessing a borrower’s ability to pay
• a ban on self-certified mortgages - the so-called liar’s loans that accounted for half of the market in 2007
• no specific controls on loan to value or loan to income but stopping loans that show toxic combinations of risk factors
• banning lenders from making arrears charges on customers in arrears who are repaying them
• making all mortgage advisors personally responsible to the FSA
• regulating buy to let and second charge loans for the first time.

In doing so, the FSA has resisted pressure from mortgage lenders and brokers to rein back from the approach advocated by the Turner review earlier in the year. Instead it will take a new regulatory approach. ‘We shall no longer intervene based solely on observable facts but will be proactively analysing risks at an individual firm level, making judgements about the prudential and conduct risks firms and consumers may face through,for example,high-risk lending strategies. We will intervene where necessary.’

As FSA chief executive Hector Sants told the Today programme this morning it’s extraordinary that banks need to be told not to lend to people who cannot afford to repay or that borrowers need to be stopped from taking out unaffordable loans - but the lesson of the crash is that they do.

The controls will operate in addition to prudential reforms that will increase the amount and quality of capital that banks have to maintain for their mortgage lending. And it does not rule out future caps on loan to value, loan to income or debt to income as part of that broader framework in future.

The measures were ‘welcomed’ by the Council of Mortgage Lenders (CML) despite its plea to the FSA last week not to regulate self-cert and buy-to-let loans. However, it pointed out the irony of proposing new controls on irresponsible lending at the same time as politicians call for more lending.

Other responses today have focussed on the potential plight of self-employed people, for whom self-cert mortgages were often the only route into the housing market. However, the FSA denies the ban will effectively freeze them out. ‘Self-cert mortgages were designed by the market to meet the needs of self-employed borrowers but grew waybeyond the consumer groups for which they were originally intended,’ points out the discussion paper.

It also remains to be seen what effect the new regime will have on lending for shared ownership and shared equity. Neither is mentioned in the discussion paper beyond the inclusion of shared ownership rent in a best practice test of free disposable income.

The FSA proposals now go out to consultation until the end of January and a feedback statement will be published in March - just weeks before a general election and a possible Conservative government that is pledged to scrap the regulator and give control back to the Bank of England.