Managing director Clive Briault told lenders last week not to make a one-way bet on house prices and asked them to stress-test their lending.
He discussed moves by prime lenders into sub-prime as one worry, noting that this raises credit risk despite being a diversification. He suggested that lenders should factor in a 20 per cent fall in house prices and a possible further reduction of 20 per cent on a forced sale for “losses given defaults” in light of the last UK housing recession and events in the US.
Much of this makes sense but where the FSA perhaps falls down is in its understanding of mortgage advice and what clients are looking for. In an ideal world, when a client goes for mortgage advice, they should be counselled not to overstretch themselves, to consider a smaller property or a cheaper area rather than take a big risk.
But any survey shows many of the drivers in society run contrary to this. Some will make their mortgage decision as part of an overall assessment of finances but many do not.
The FSA must be concerned about affordability and must remind lenders, prime and sub-prime, and brokers of their responsibility to ensure clients are borrowing responsibly.
Money Marketing wonders on the limits to regulation. Can regulators restrain an industry when the clients want to borrow more and believe they can make sacrifices or work harder to do so? We also wonder how the FSA and, for that matter, the ombudsman will define responsible lending if we did enter a time of falling house prices and rising unemployment which would take many people into arrears or worse.
At the very least, brokers and lenders should make sure they comply with what the regulator is saying today but they should also take careful note of what is said for future reference in case retrospective regulation hits the mortgage sector like it has hit other sectors before it.