Banning ‘liar loans’ sounds like an obvious starting point for any future regulation of the mortgage market but is there a danger it could completely exclude many people from home ownership?
That’s the case made by the Council of Mortgage Lenders (CML) in its response to the consultation that’s just closed on the Mortgage Market Review by the Financial Services Authority (FSA).
Self-certified mortgages were originally designed to allow people who can afford a home but cannot verify their income to get into the market. That especially applied to the increasing numbers of people in the 90s and noughties who became self-employed but not for long enough to produce three years’ worth of accounts.
But they opened the door to thousands of borrowers to lie about their income to mortgage brokers and lenders who seemed only too happy to turn a blind eye in a rising market. That fed the boom - astonishingly, by 2007 more than half of mortgages were self-cert - and racked up arrears and losses for lenders when that turned to bust.
The self-cert ban was one of the main proposals in a discussion paper published by the FSA in October alongside regulating buy to let and second charge loans, affordability tests for all mortgages, more sophisticated risk tests for loans and new controls on mortgage advisors.
But the CML argues in a response this week that the real problem came when self-cert was lumped together with the fast-tracking of applications - a system that was meant to be used for lower-risk borrowers. New controls could prevent the toxic combination of the two without excluding people who can safely afford a loan.
In the meantime, it says, self-cert mortgages have disappeared, lenders have tightened their approach to electronic underwriting and borrowers are being more responsible.
‘The market has therefore corrected itself, and a shortage of funding and tighter credit assessment mean that there will be no return to past excesses in the foreseeable future,’ it argues. ‘That is re-assuring, and provides some useful breathing space for the FSA. The regulator now has time to make sure it is clear about the real causes of consumer detriment, to test its proposed reforms carefully to make sure they address it, and to deliver the right balance of costs and benefits for lenders and borrowers.’
The CML continues to resist the regulation of buy to let and also warns that the regulation of second charge loans could have an unintended effect on Homebuy Direct as operated by private developers. As with the self-employed, it’s hard to argue with its plea for more work on the details and more rigorous analysis of the reforms.
However, the danger is that further delay could see the case for regulation go by the board. The FSA is due to publish a feedback statement on responses to its plans in March, just weeks before the general election has to be held. If the Conservatives win, they say they will abolish it and hand control to the Bank of England.
The market may have corrected itself for now but only after causing a crisis that will inevitably be repeated if greedy brokers, desperate borrowers and complacent lenders are not saved from themselves.
Have your say
You must sign in to make a comment