Forcing lenders to check that borrowers really are earning as much as they say seems pretty fundamental to effective regulation of the mortgage market - but could it make things worse rather than better?
A ban on self-certified mortgages is the key proposal in a consultation paper published today by the Financial Services Authority (FSA). The so-called liar loans accounted for more than half of all mortgages sold at the peak of the market in 2007 and still made up 42% of loans taken out in the first quarter of 2010.
The FSA points out that the only other countries with a significant non-income verified market are the USA and Ireland, both of which saw a boom and bust in mortgage credit and house prices. Countries like Canada and Australia where the majority of mortgages were income verified did better in the financial crisis and saw lower levels of arrears.
The Council of Mortgage Lenders (CML) argues that its plans will not just stop self-certification but also fast-track mortgage processing used for lower-risk borrowers. ‘The risk is that the gain will not match the pain in the short term,’ says director general Michael Coogan. ‘The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future.’
The Intermediary Mortgage Lenders Association (IMLA), which represents specialist lenders who deal through brokers rather than a direct network, goes even further. The FSA plans represent nothing less than a ‘step into the abyss’, according to its executive chairman Peter Williams.
Williams argues that ‘the FSA has taken regulation into uncharted territory with unknown consequences for the shape and effectiveness of the UK mortgage market’.
Moreover, he adds: ‘It has done nothing to address the big question today regarding the lack of mortgage finance; the market it plans to bequeath to us seems some considerable distance from meeting the requirements of an ‘age of aspiration’, as set out recently by the housing minister Grant Shapps.’
The issue as always is how to strike the right balance between consumer protection and that aspiration. Self-certified loans started off as a way to get a mortgage for self-employed people who find it hard to verify their income but turned into a free-for-all for anyone who needs a bigger mortgage than they can afford. Similarly, sub-prime mortgages were a way for people with impaired credit to get on the housing ladder before they became a symbol of all that was wrong with the boom and bust.
Too much regulation means excluding thousands of potential first-time buyers from the housing market at a time when 80% already need help from their parents. Too little risks fuelling yet another house price boom and bust.
As CML figures showed yesterday, low interest rates mean mortgage payments for existing homeowners currently make up a lower proportion of their income than at any time since 1974. Even with surveyors warning today that house prices are likely to fall, that sounds like a ladder well worth lying about your income to climb aboard. Those low rates also explain why arrears and repossessions problems have not developed into a full-blown crisis.
The political temptation for the government must be to water down the proposals of the FSA, which in any case is about to be abolished. However, interest rates cannot stay at a historic low for ever. Any sudden increase would risk turning an age of aspiration into first another age of speculation and then another age of repossession.
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