The Financial Services Authority (FSA) today announced plans to prevent a return of the risky mortgage lending seen in boom times, by ensuring that common sense standards continue to apply in future.
The Mortgage Market Review aims to prevent a recurrence of the irresponsible lending which resulted in some borrowers taking on mortgages which only seemed affordable on the assumption that house prices would always rise. Many of those borrowers ended up struggling to repay their mortgage and in danger of losing their home.
The proposals will see prospective borrowers – whether they are first time buyers, right-to-buy tenants or home movers – get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant’s realistic ability to repay their mortgage.
The FSA has significantly amended the proposals following detailed feedback from lenders, consumer groups and other stakeholders and informed by a cost benefit analysis which is also published today. The FSA is now encouraging consumers, industry and all other interested parties to give their opinions on this new, full, set of proposals as well as on the accompanying cost benefit analysis.
Following consultation, the FSA Board will make a decision on the final form of rules in summer 2012, but implementation will not be before 2013.
At the core of the proposals are three principles of good mortgage underwriting:
- Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
- This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever; and
- Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.
The FSA believes it is important to have the rules well established long before any future upturns in the economy.
Key features of the proposed future regime include:
- Income will have to be verified in every mortgage application;
- Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax;
- Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough;
- Lenders will have to consider the impact of increases in interest rates in line with current market expectations;
- Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs; and
- Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.
The FSA is also calling for feedback on developing a specific approach for entrepreneurs who borrow against their home to fund their business.
Lord Turner, chairman of the FSA, said:
“We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.
“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be – how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.
“The estimates are inherently uncertain, but they suggest that the new rules would have only a marginal effect in current market conditions – and particularly so for first time buyers – but would act as a significant constraint if market practice were in danger of returning to the 2005 to 2007 pattern. That pattern of effect would be a highly desirable one. We are however particularly keen that lenders provide their detailed assessment of the likely impact of these proposed rules. Then the FSA will be able to make appropriate final decisions.
“The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders. We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past – leaving most borrowers unaffected, but better protected.”
The consultation is open until March 30 2012.