Call Credit

FSA Mortgage Market Review

20/10/2009

The Mortgage Market Review has been awaited with interest since its announcement in the Turner Review Report.  It is the impact on the industry from the FSA’s shift to a more “intrusive and intensive” approach to regulation that will attract most attention.

It is felt that the existing framework has failed to prevent irresponsible lending or borrowing.  There is a perception that offering consumers access to information to help them make better decisions has not worked - now making it necessary for the FSA, via lenders, to protect consumers from themselves. 

The FSA says that it intends to

             “make it clear that ultimate responsibility for affordability lies with the lender irrespective of the distribution channel chosen”

Key views expressed in the paper:

•  Increasing capital requirements is not a good way to deter risky lending.  Capital held under IRB is already sufficient to cover defaults, while increasing capital requirements on high risk loans would likely result in borrowers being impacted as the costs were passed on.

• The case to impose caps on loan to value, loan to income or debt to income ratios is not proven – but not completely ruled out, notably in conjunction with other risk factors.  FSA analysis demonstrates that category of mortgage (e.g. self-certified or credit impaired) is a much stronger predictor of default than loan to value, or indeed loan to income. 

• One area where the FSA considers reform to be “non controversial” is non-income verified mortgages, a category including both “self certified” and “fast track” mortgages.  They intend to seek verification of income across all mortgage applications, as an anti-fraud as well as pro-responsibility measure.

• The FSA plans to ensure affordability assessments are adequate by requiring lenders to always assess ability to repay based on leftover disposable income.  Lenders would always be responsible for making sure this was done, even when a broker is involved in the process.  The broker would do their own simple check to start with as a basis for their sales process.  To avoid those with affordability problems taking an interest only loan, it is proposed that affordability would be always be assessed on a repayment basis.

• Expenditure verification is considered good practice especially when it is easy to do so, e.g. check debts against CRA data.  The FSA says it would like to see all credit data being shared through the CRAs to support this.

•  A need for better standards relating to mortgage advisors was identified with a small but surprising number having been implicated in poor practice or financial crime.  The FSA intends to now include them in its “Approved Persons” regime.

•  Consumers need protecting – from themselves.  The FSA recognises that “mis-buying” took place by a “significant minority” of consumers who may have focused on getting the house rather than thinking about the mortgage.  It no longer believes it can rely on mortgage customers acting rationally to protect their own interests or on increasing financial capability. 

• The FSA intends to consult on turning existing guidance on forbearance into binding rules requiring lenders to use tools to help borrowers in trouble.  Action will also be taken in January to ban some arrears charges that are felt to be particularly unfair.

• It wants to bring buy to let lending, second charge lending and the purchase of mortgage books under FSA regulation.

•  Finally, it’s felt formally defining some well-worn terms in lending such as near prime, off prime and so on would help understanding of the market.

The Mortgage Market Review paper will be discussed and views accepted until the end of January.  A Feedback Statement will be published in March, followed by consultation papers.  The intention is that speedy implementation will then take place of the steps identified as necessary to reform the existing framework.

Callcredit is pleased to note the analysis-based approach used to illustrate views on LTV and LTI.  This will help lay commentators who find this simplicity appealing to understand how such measures would not address the problem.  It is positive that affordability assessment is instead identified as a more appropriate means to achieve responsible lending, though the ideas presented look overly prescriptive. 

We agree with the FSA that checking debt levels against credit reference agency information is a straightforward, good practice check, and that all credit information should be shared through credit reference agencies.  While credit reference information is highly comprehensive, any small gaps that remain reduce the ability to lend responsibly, and make it more difficult for lenders to accurately assess the risk of default – resulting in making credit more expensive than it needs to be.

The FSA’s work here confirmed that a key problem area in affordability is people who only have low debts, but also have low incomes.  Callcredit has been clear for some time that examining debt levels alone is not enough.  The Over-Indebtedness Initiative has a unique capability to reflect income, compared to other “affordability” surrogates which may need to depend heavily on total debt values.  It is concerning such limitations may inadvertently have helped lower income debtors to sail under the “risk radar”. 

We agree with FSA perceptions that some consumers have not acted responsibly when borrowing, and that better product explanations and financial capability cannot address this alone.  As the paper says,

           “it seems unlikely that a lack of financial skills was behind the widespread overstating of income found in self-certification mortgage applications.”

Forward to a colleague

previous page