Will the fast show go on?
The mortgage industry is confident that some form of fast-track mortgages will survive the mortgage market review despite FSA proposals to ban them.
Fast-track mortgages are loans where a lender reserves the right to request evidence of income during the application process but does not always do so because they may consider the customer to be low risk.
The regulator is concerned these types of loans could be used to bypass income and affordability requirements and is planning to ban them, along with self-certification mortgages, as part of the MMR, which could be introduced in the summer of 2013. The FSA says lenders will have to verify income in all cases.
Much of the industry has put the case for the benefits of fast-track business and some feel a different, more controlled form of fast-track, where income is verified in every case, might continue after the MMR is implemented.
They argue that while lenders will be ultimately responsible for checking income and assessing affordability, there is nothing stopping lenders from outsourcing this process to brokers.
Association of Mortgage Intermediaries director Robert Sinclair says: “If you take fast-track to mean no checking at all, then that is not right. But where people pass a threshold credit score because of the information the lender is comfortable you are providing, then I do not see any reason why they should go through a more tortuous underwriting process.
“The requirement to show evidence of income in all cases is, therefore, something that remains a barrier in the process. It is a question of whether the lender would be willing to delegate the responsibility of checking that information to a third party, maybe a broker. If that is the situation, then fast-track could continue.”
Some brokers feel a ban is inappropriate as it makes sense to lower the admin costs of dealing with low-risk customers. Also, FSA research shows historically the arrears rates in fast-track mortgages is around 5 per cent compared with 7 per cent for income-verified mortgages.
John Charcol senior technical manager Ray Boulger says: “If lenders chose to cut back on their admin, having made a rational decision that certain cases are of a sufficiently good quality that they can check less, then that is a perfectly sensible decision.
“I know a number of lenders have been able to say to the FSA their arrears record on their fast-track business was better than their arrears record overall, which is exactly what you would expect. But despite this, the FSA has decided to go ahead with the ban. It is inappropriate. It is a lender’s decision, although there could be a different form of fast-track after the MMR.”
It is unclear how lenders will approach the issue until the rules come into force but early indications are they will be cautious.
A Council of Mortgage Lenders spokesman says: “If brokers can help produce the relevant information more quickly, borrowers may benefit from faster processing, so we may still see a more limited and significantly modified form of fast-tracking. Ultimately, however, responsibility for verifying income will lie firmly with the lender.”
Intermediary Mortgage Lenders Association executive director Peter Williams says: “There should be some opportunity for fast-track but I think lenders will be much more cautious. If I am saying to a broker to go and do much of the processing, I have got to be absolutely confident that what is being done is appropriate.”
A running theme that has emerged in the MMR is that lenders have already implemented many of the proposals before they have come into force. Chadney Bulgin mortgage partner Jonathan Clark feels this is true of fast-track mortgages.
Abbey for Intermediaries, for example, asks intermediaries to have the relevant documentation at the time the case is submitted and requires them to keep this information on file for a minimum of two years. If a broker fails to do this, a warning is issued and further failures result in the broker being temporarily banned from submitting fast-track business to AFI.
Clark is less confident about fast-track business existing after the MMR. He says: “I cannot imagine there are any brokers out there who are not checking this information these days, so it is something which is happening already. As long as it is policed correctly, fast-track is entirely appropriate.
“But because lenders are ultimately responsible for this, there is a concern we could see a shrinking of a fast-track-type process or lenders pull out of it altogether.”
The major concern is if lenders decide they do not want to let brokers source the documentation in these types of cases, then mortgage prices will increase as a result of the increased admin costs.
Sinclair says: “If lenders do not feel confident in doing this, the consumer will end up paying. The cost of then checking this could mean about an extra 12 basis points on a mortgage.”