The Council of Mortgage Lenders has performed a huge service to homeowners and prospective homeowners with its detailed analysis of the FSA’s mortgage market review proposals on responsible lending.
The CML analysed all regulated loans in its data set (95 per cent of all regulated loans) for the four years to March 31, 2009 and assessed whether the lender would have been permitted to agree the advance under the FSA’s proposed new restrictions.
Using the more lenient of the two payment to income thresholds proposed by the FSA, that is, 35 per cent, and factoring in the other restrictions proposed by the FSA, the CML found that 51 per cent, or around four million loans granted during that period, would have had to be declined. Firsttime buyers, predictably, would have been particularly badly hit.
The FSA has admitted that its calculation that only 17 per cent of loans actually agreed would not have been allowed under its proposals was based only by reference to the PTI restriction, with all the other proposals being ignored. That is hardly a clear, fair and not misleading representation of supposed facts.
Another key aspect of the MMR that has been completely ignored by the FSA, but which the CML has highlighted, is the proportion of loans that would have been banned under the proposals but have performed with no problems compared with loans which were granted and subsequently went into arrears or resulted in repossession.
There was no evidence of payment problems in 95 per cent of the four million loans which the FSA would have prevented but 151,000 arrears cases and 38,000 possessions might not have occurred. Lenders and the FSA accept that some loans will become non-performing but most arrears and repossession cases result from postcompletion events which could not reasonably have been foreseen at the time the loan was agreed such as relationship breakdowns.
At least the FSA has not proposed adding a question to joint applicants on mortgage application forms along the lines of “do you expect your relationship to last at least as long as the mortgage?”.
The coalition owes a debt of gratitude to the CML. Without the robust evidence it has provided, the Government would have been less likely to recognise the damage the MMR will inflict on the housing and mortgage markets, with the inevitable knock-on effect on the wider economy.
In a housing market with transactions halved from the current already very low level, chains would be very difficult to complete. The large amount of economic activity generated when people move home would fall sharply, reducing VAT receipts, and stamp duty land tax receipts would fall off a cliff.
The feelbad factor of frustrated purchasers would very probably negatively impact on the coalition partners’ electoral prospects.
Ray Boulger is senior technical manager at John Charcol