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‘Don’t lock millions out of the mortgage market’

Over two million borrowers could be prevented from moving or remortgaging due to the FSA’s plans for mortgage reform.

The Council of Mortgage Lenders last week produced two new pieces of research to outline its concerns about the FSA’s current mortgage market review.

The research was conducted independently but funded by the CML. It was carried out by economic research consultancy Oxera and economic and social research consultancy Policis. Both papers look at what impact the draft rules will have on the market. The research from Oxera focuses more on the compliance costs and implications on the industry while the Policis report looks at the likely effects on consumers.

The Policis research suggests 19 per cent of borrowers, 2.2 million people, could potentially be prevented from moving or remortgaging while 31 per cent, 3.4 million people, would have to borrow less than they require, due to the MMR.

It estimates that within a year of the policies being implemented, 483,000 mortgage holders wanting to buy or renters wanting to buy would be affected, with 150,000 shut out of the market entirely. This would cause a reduction in lending volumes of almost £42bn a year, it says. Furthermore, 380,000 borrowers wanting to remortgage would be refused in the first year of the MMR, cutting up to a further £45bn a year from the market.

It says the MMR would have an impact on comparatively large numbers of current borrowers “who have never had any problems paying their mortgages”.

The report says: “We as a society must make a choice on where we wish to stand on the regulatory options in the full knowledge of the likely consequences of our choices.”

It claims fears of an affordability and repayment crisis are overdone and evidence does not support the idea that low rates are masking financial distress.

Policis stresses policy concerns over affordability do not take into account flexibility of consumers’ budgets and their ability to prioritise mortgage payments.

The report says: “87 per cent, of those who have experienced reduced income through the recession have adapted their budgets without significant strain on their finances. Consumers have adapted their budgets to changed economic conditions and have prioritised mortgage payments.”

Policis says only 5 per cent of borrowers admit they are struggling to meet their commitments while just 2 per cent feel unable to catch up. It says job loss and reduced earnings are the main drivers of mortgage payment problems and not mortgage affordability. It also defends the use of interest-only mortgages and says, for the most part, borrowers understand the choices they make and choose either interest-only or capital repayment options based on their own circumstances.

The report says: “Most borrowers do understand the interest-only concept and have made a conscious decision to use interest-only in a broadly strategic way and understand the implications of their choice. For these borrowers, the interest-only product would appear to be playing a legitimate and productive role.”

It does concede, however, that 18 per cent of interest-only customers, who are largely older borrowers, do not understand the product they have bought and are vulnerable. But, in the main, Policis believes the current generation of interest-only borrowers have a plan and the resources to pay back the capital.

The Oxera report focuses on compliance costs and indirect costs associated with the MMR.

Interviews were conducted with 12 lenders, covering six banks, four building societies and two non-deposit-taking lenders, to see how the rules could be implemented by different types of lenders. This focused specifically on the income verification and affordability rules in the MMR.

Oxera estimates the cost to the industry of the proposed rules on income verification would be between £7.1m and £10.3m each year, as some applications may require further investigation.

The discussion group concluded that the cost of verifying income would be around £4.50 per application and where further investigation is required around £18.

It also estimates that income is already verified in about 70 per cent of all mortgage applications. However, some of the bigger lenders, according to Oxera, indicate their systems and procedures would not make it attractive for them to deal with cases which require further investigation.

The rules over affordability propose that lenders should be required to take into account expenditure when assessing affordability. Oxera argues that some life events cannot be easily predicted.

The report says using life events in an affordability calculation would make it difficult to calculate both the size of the loan and to find out how the borrower deals and adapts with life-changing events.

It says any attempt to do so would lead to a risk of having a significant amount of borrowers who do not meet the affordability criteria but would be able to repay their loan.

But it also says any set of affordability rules must be robust enough to ensure there are not a lot of people who meet the criteria but who turn out to be unable to repay their loan.

The report says given the problems with the current FSA affordability proposals, “it would be useful to consider amendments to the proposed rule”. It also recommends the possibility of using the Office of Fair Trading’s approach to recording unforeseeable events, in which lenders only take them into account when the borrower draws them to the lender’s attention.

Following publication of the research, the Council of Mortgage Lenders is calling on the FSA to reconsult the industry over its proposals.

At the research launch last week, CML director general Michael Coogan said while the current proposals in the MMR were well intentioned, they are “flawed and impractical”.

The research echoes previous claims from the CML, which stated the MMR plans would exclude a number of borrowers from the market and would come at a significant cost to the industry.

What brokers think

John Charcol senior technical manager Ray Boulger: “You are looking at this having a huge impact on the market and on the wider economy, and not forgetting the individual problems it would cause.

”In the light of all of the comment, bearing in mind what we have got at the moment is a consultation document, it would be very hard for the FSA to not make any changes, and indeed I think there are increasing signs that the Government will get involved as well. The end result will be somewhere between where we are now and where the FSA wants to take us.”

MoneyQuest managing director Simon Jackson: “Anything which reduces the ability of the market to trade properly, especially anything regulatory, is pretty poor in this current state of the market. The job of the FSA should be to work out ways of stimulating the industry. I am not sure the MMR does that.”

London & Country head of communications David Hollingworth: “It is concerning. The point I think they are trying to make is that you are going to have a serious impact on individuals and homeowners who have done nothing wrong. When they are looking to remortgage or move on, they are going to find the goalposts have moved quite considerably.”

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