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CML warns FSA plans would have excluded 3.8m “good” loans

If the FSA’s Mortgage Market Review proposals had been in place between the second quarter of 2005 and the first quarter of 2009, around 3.8m “good” loans would have potentially not been granted, according to the Council of Mortgage Lenders.

It says this equates to around 51 per cent of total loans in the period.

In an analysis, which was based on a one-off sample survey of loan performance from 26 firms as at August 1, 2009, the CML chose a select number of the regulator’s proposed measures – the ones it could reliably measure – to assess their affect on lending.

The proposals considered in the CML’s analysis were the requirements for lenders to:

  • assess affordability by looking at income/expenditure
  • assume the mortgages will be on a capital-plus-interest basis, even if it is to be interest-only
  • apply a buffer to the affordability test for applicants with an impaired credit history
  • apply an interest rate stress test, to assess whether the loan continues to meet the affordability test if rates rise
  • assume a maximum term of 25 years for the loan, even if the actual term is to be longer

The CML found on the basis of affordability alone, 16 per cent of loans between the second quarter of 2005 and the first quarter of 2009 would not have been granted a mortgage.

The trade body says: “It is clear that the effect would have been to disallow many mortgages that have posed no problems for lenders or borrowers to date.”

It adds: “Indeed we welcome the Mortgage Market Review and accept many of the principles that it proposes.

“However, our concern is to make sure that the rules which are finally implemented are clear in their intended impact, practical in their  implementation, and fair in their overall effect on consumers, intermediaries and lenders alike.”

In a response, the FSA says: “Our proposals are designed to address the major failures that have occurred in the mortgage market and we are actively consulting with all stakeholders to ensure we get the right solution.

“Our evidence shows that 16 per cent of borrowers are already financially overstretched and they are facing problems now as a result of their lenders’ practices in the past, not the MMR.  But for now borrowers are also benefiting from historically low interest rates and house price inflation – which cannot go on forever.

“This is why it is imperative that we take steps to protect vulnerable consumers and ensure lenders are making responsible decisions.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Why does the FSA assume that people are ‘vulnerable consumers’? This is typical of the high brow political class that assumes that anyone that doesn’t work in Whitehall or Canary Wharf is somehow mentally deficient and unable to make decisions for themselves.

  2. Unfortunately the key point which is constantly missed is that the main cause of financial stress in many households is the unconstrained promotion of credit cards, unsecured loans, store cards etc most of which is peddled on demand without reference to affordability at all. The regulation of this sector by the OFT is completely ineffectual and until this changes attacking the mortgage market, which is actually largely well operated, will not solve the problem of financial distress.,

  3. Did CML test a similar sized sample of failed loans to see how many of those would not have been arranged under the proposals?

  4. The trade body says: “It is clear that the effect would have been to disallow many mortgages that have posed no problems for lenders or borrowers to date.”

    Yes but how many of those people would be struggling now had we not had historically low interest rates?

    The measure is not have they been able to keep up with their payments for the last 18 months when rates are so low but more like how will they cope in two years time when the rates are 2-3% higher than they are now?

  5. I totally agree with Mike Hanson about credit card regulation. This type of lending is the unseen Cancer in our financial system. Far to many people nowadays have 3 or 4 credit cards and keep borrowing from Peter to pay Paul.

  6. I have said for years that under normal circumstances a mortgage does not cause the financial problems it is extra credit taken on in the form of loans or credit cards which do not appear to have any affordability strategy attached.

  7. How is it that people like Mike Hanson,Rob McKinnon&Terry can put their finger on the problem(without being paid for it ) while the Brains Trust at the almighty FSA Hav,nt got a clue???.Makes you wonder .

    All to often in the past IFA,s have increased Cliehts Mortgages to pay off rip-off Banks Credit Cards,Leaving them far better off

  8. I wonder how many employees of the FSA etc who applied for a mortgage during those times would have been rejected. What would their response be if they were refused. They would not be so keen to make it difficult to get a mortgage in future. Affordability is an emotive subject. You could have an applicant who have monthly commitments refused, but some one who blew their money on wine women and song get accepted.

  9. I have to take issue with the the FSA over their statement that borrowers are benefiting significantly from low interest rates. Three years ago borrowing around, or even below, BoE Base was achievable for good borrowers with 10-15% deposits. This meant actual rates of about 4-4.5%.
    Now with lenders margins having been widened so significantly most borrowing is still around 3.5 to 4.5% and prices in most areas of the UK have yet to return to the levels of a few years ago, London is perhaps the exception to this.
    Unfortunately as the FSA still does not understand the mortgage market it will continue
    to to fail in its regulatory capacity.

  10. The FSA is right to be concerned about the impact a rise in base rates will have on affordability for many borrowers ‘close to the margin’.

    But perhaps it might be a little more pro-active in making the lenders rein in the excessive profits which they are making from trackers with 3%-5% margins over base and similarly inflated SVRs.

    And as for the cause of the problems in the mortgage market – the FSA needs to look at its its own part in this debacle.

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