FSA mortgage paper: broker reaction
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Mortgage brokers have warned that lenders must review how they deal with self-cert borrowers or risk leaving a proportion of the population out in the cold.
The FSA’s mortgage regulation discussion paper, released today, sets out proposals for the future of the mortgage market including banning any mortgages without proof of income, forcing mortgage lenders to be responsible for affordability decisions and regulating both buy-to-let and second charge mortgages.
The paper stopped short of imposing level procuration fees for mortgage brokers although the regulator did say that in the run-up to the credit crunch, the high commissions paid to advisers selling sub-prime loans contributed to borrowers being sold unaffordable mortgages. However, the FSA says these products were only rarely missold. New regulations will also see individual mortgage brokers separately registered by the FSA.
First Action Finance head of communication Jonathan Cornell says: “I am disappointed over self-cert and fast track. Whilst I understand their concern over self-cert, I think it is a very valid product if it is underwritten and advised sensibly. There is a real danger, that if you scrap self-cert and fast track, you will have a vast proportion of the labour force denied mortgages.”
MortgageForce technical manager Katie Tucker agrees. She says: “Banning self-cert is just blanket regulation, and that’s a very expensive and inefficient way of going about reducing risk. It would be more ideal if lenders used individual underwriters to assess risk on a merit, case-by-case basis. But the harsh reality of it now is those who cannot quantify their income will not be able to get a mortgage, the whole group will be removed from the market.”
“Banning self-cert is just blanket regulation, and that’s a very expensive and inefficient way of going about reducing risk.”
Katie Tucker, MortgageForce
Cornell predicts that lenders will ease up on proof of income verification over the long-term instead of prescribing to the limited self-cert proof of income demands that are currently demanded.
London & Country head of communications David Hollingworth says: “If the FSA is to get rid of it lenders will have to become more open-minded with the type of affordability evidence they accept. Rather than two years accounts or no verification at all as we have been used to, there must be other evidence acceptable - like business statements, for example. Lenders may move to a more realistic requirement, because if they stick with their current demands it will leave many people without a mortgage.”
Tucker says the self-cert ban could be beneficial for advisers in the long run. She says: “If the lenders move to some sort of limited self-cert, which needs some underwriting, brokers would be able to negotiate and work with the lender to provide the safe loan using limited proof like bank statements or P45s.”
The FSA has also proposed new rules that would make sure that the ultimate responsibility of affordability lies with the lender of the mortgage. Cornell says: “I think lenders have been responsible for affordability all along as they bear the financial risk for that mortgage - if they didn’t think they were ultimately responsible then there is something terribly wrong.”
Hollingworth says this move should be welcomed by advisers as it will end the ‘blame game’ and put both intermediaries and lenders on an even keel when it comes to consumer rights.
Cornell says: “There needs to be further clarification of the roles of intermediaries when it comes to affordability as they are much better placed to assess affordability, provided they are given the right tools.”
Tucker also welcomed proposals to regulate the buy-to-let mortgage sector but warned that it is too easy to regulate the whole market without understanding the differences between ‘personal’ investors and ‘commercial’ landlords. She says: “If the buy-to-let is viewed as a commercial venture then it is a business activity and should be regulated as a company would regulate risk. It shouldn’t be down to the Government or the lender to decide. So the FSA needs to define the difference between personal and professional either by how many properties you have or your total exposure in relation to your total income.”
“I would hope that this paper leads to ‘non-advised’ sales being clarified as there are a lot of people getting non-advise mortgages and think they are getting advice.”
Jonathan Cornell, First Action Finance
Cornell says he is disappointed that the FSA is proposing that the bank does some sort of fact find before the product is offered. He says: “It is still allowing people to make the wrong choice - I would hope that this paper leads to ‘non-advised’ sales being clarified as there are a lot of people getting non-advise mortgages and think they are getting advice. That’s incredibly dangerous and I don’t think the FSA understand how important an issue this is.”
Hollingworth says: “The general feeling towards financial services, banks in particular, is far from charitable right now, so there was temptation for this to be a knee-jerk reaction whereas this paper is relatively measured.”
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Readers' comments (4)
Evan Owen | 19 Oct 2009 1:30 pm
The problem is that the regulator has seen what happens in a 'free for all market', many 'advisers' were selling adverse credit/self-cert mortgages to people who could have obtained a normal mortgage, why? Could it have been because the proc fee was in the £thousands rather than £250? Who allowed this to happen? Whoever decided that the approved persons regime wasn't needed for the supervision of mortgage advisers and that the firms could simply be transferred from MCCB to the FSA. Oh, and because the lenders had a neat way of packaging even the most risky of lending and flogging it off to some other mug.
We also had the big banks using automated underwriting systems which decided whether income verification was required, or even if a previous lender reference was in order. Was all this done in the name of 'churn' and speed of remortgaging? Not having to wait for a busy employer to respond and not alerting the existing lender to losing a customer was the order of the day? All this was refined by the likes of NR, HBOS, RBS and Lloyds to the point where even the need for a physical valuation was removed somewhere along the line.
The solutions proposed by the regulator is using a sledgheammer to crack a nut as per usual.
The next nut will be the secured loans market which was many times worse than the above.
I used to believe that regulation of mortgages and insurance was unnecessary until I saw what was going on out there, now I believe that supervision is required. The good advisers have nothing to fear and everything to gain when the roques are out of the market, hopefully for good this time.
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SIMON MANSELL | 19 Oct 2009 1:49 pm
Baron Mandy Mandelson knows all about Self Certified mortgages. Perhaps as Business Secretary and confidant to "Cash" Gordon (father to the FSA) Baron Mandelson was able to advise the FSA on Self Cert Mortgages! You may recall Mr Mandelson failing to disclose the small matter of his constituency property at Hutton Avenue, Hartlepool, or his mortgage on the property, either during the initial discussion with Britannia or at any other time! What did the FSA have to say then? If the FSA plan on a retrospective witch-hunt should Baron Mandy Mandelson be first in line or will "Cash" Gordon have a quite word with the “independent” regulator to lay off his mate?
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Tony | 20 Oct 2009 9:21 am
Self cert mortgages do need to be banned outright. This is what allowed so many people to lie about their income, therefore the concept is totally flawed. Whe it comes to houses or BTLs people will do what they have to get that dream home or money for nothing business started.
I'm sure the FSA does not want to stop people geetting loans if they can afford it, but it is not up to them to specify how to verify the self employed.
I hope the next nut is secured loans, and a limit is placed on salary multiples and combinations between couples. This is what holds house prices unsustainably high. Sure the building trade won't be as lucrative, but maybe we might see supply and demand working again.
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Julian Stevens | 20 Oct 2009 12:03 pm
The abolition of self-cert mortgages may well avert future problems arising from people borrowing more than they can realistically afford. However, it may well also cause huge problems for people who already have high LTV mortgages that they originally obtained on a self-cert basis. What are the lenders likely to do to those people when their fixed rate deals come to an end and they cannot move to another lender? Hammer them with a massive hike in the rate of interest being charged.
What the FSA should have done alongside this new ruling is stipulated that for people coming off fixed rate deals, lenders may not impose rates more than say 1% above their standard variable rate for new as well as existing borrowers.
But, as always, the trouble with the FSA is that it never thinks these things through. Abolishing self-cert mortgages is probably a good thing in the long term, but the short term collateral damage resulting from an overnight ban could be horrendous. Yet another example of heavy handed and inept regulation.
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