Lenders should stop viewing interest-only as the devil's spawn
Since the height of the market when almost half of all loans were being written on an interest-only basis, we have seen many different approaches canvassed.
Initially the Financial Services Authority, in the Mortgage Market Review, indicated that this might be the spawn of the devil.
In dialogue and later parts of the MMR we have seen a more sensitive, balanced and considered treatment of what is undoubtedly a viable option for many customers.
If the FSA has shown flexibility on this issue, the lenders have displayed acrobatic skills of a variety only seen in the best circus acts.
Whether it is limiting these to lower value loans, applying ligatures to the types of repayment vehicles permitted, becoming “mystic meg” on the eventual value of vehicles, or introducing LTV caps, there is no consistency of approach.
In a competitive market many might argue this is good in that it allows good brokers to place business with the lender the customer fits.
However I am concerned that this is introducing a new breed of mortgage and property prisoners, so making the prudential position of lenders worse as these are loans that will not move off the books at the usual rates of turnover.
As an industry, having got our customers into these products, it cannot be right to abandon them with changed criteria that imprisons them to decisions they did not envisage, nor did we as the product experts think would prevail.
Our responsibility as a lending industry is deeper and we need to shoulder that burden. The product should continue to do what it said on the tin.
Certainly for absolutely new loans we need to apply tighter criteria which when applied sensibly will work for all parties.
In my dialogue with the policy teams at the FSA, they do not see this as a mass market product, nor is it niche.
It is dangerous to wrap figures or “targets” on the size of this market, but it would be safe in my view to say that it might be right for about 20% of the market.
Nor does their concern over speculative repayment vehicles extend to the type of investment vehicle. It is merely that it should not be intangible - an inheritance that may never come, or a lottery win.
I often wonder if there is a gap in how FSA supervisors interpret their policy colleagues work, or if some lenders just jump without mature dialogue with the right stakeholders.
Or it may be that other imperatives drive decisions that firms feel unable to disclose.
What is needed is sensitivity. There are a lot of interest-only customers out there on default rates that are currently a safe haven. This will not always be the case. We must not create a straight-jacket by lenders having inconsistent and conflicting policies that give regulators space to apply all the denominators and close the options in this sphere.
Our customers all deserve better of us.