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FCA considers tougher mortgage stress tests than under MMR

The FCA discussed at its December board meeting a recommendation by the Financial Policy Committee for further mortgage stress testing on top of new Mortgage Market Review requirements.

The MMR comes into force in April and requires firms to test affordability against five-year interest rate projections.

The FCA’s December board minutes, published last week, reveal the Bank of England’s FPC has recommended to the regulator that it require mortgage lenders to have regard to any of its future stress test recommendations over and above the MMR requirements.

The minutes say: “This would be discussed at the next board meeting in detail.”

Minutes of the FPC’s November meeting show it believes the MMR interest rate affordability test “might not always be sufficiently prudent.”

The minutes say: “The committee agreed it would be appropriate to take action now to introduce a policy tool that could be adjusted, if needed, to guide changes in the stress-test interest rate used in MMR affordability assessments.”

The FPC minutes also note that according to FCA chief executive Martin Wheatley, it would be possible to introduce a rule shortly after the implementation of the MMR that meant any FPC recommendation on stress testing would come into effect with firms “in a timely manner”. The rule would need to be subject to a consultation.

Separately, the regulator plans to issue a discussion paper early this year relating to fairness in mortgage contracts.

From 26 April lenders will have to stress test borrowers’ affordability to take into account the impact of expected future interest rate increases with reference to market expectations over the next five years.

Under the MMR, lenders will have to stress borrowers against their existing SVR plus an additional percentage to take into account future base rate movements.

The FCA wants lenders to take into account market expectations of base rate movements in the first five years, with lenders’ SVR plus the forward sterling rate a suggested measure. Currently the forward sterling rate is over 3.5 per cent.

Lenders recently raised concerns that the measures could cause decline rates to rocket.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. As well as accommodating interest rate rises stress tests should also include a facility for increasing income – incremental annual increases built in to salary structures; spouse will be back at work when children start school, etc. In the past these factors have been completely ingnored. Also, factors such as other property assets which could be sold to repay a mortgage. Often this is ignored. The stress tests should belong to the real world.

  2. Grey Haired Underwriter 17th February 2014 at 11:59 am

    The FCA are going to kill the mortgage market for any but the very ‘vanilla’ cases. In reality their whole ethos seems to be to rid the market but all of the top five/six lenders and we will see a small cartel of very large lenders wholly dictating the mortgage market. If you look at the way such a small cartel works it would do no harm to compare it to energy providers who now seem to be able to charge what they like with impunity. Do we really want to put that sort of power in the hands of the large banks?

    I think it is about time that the FCA employed people who understood the market they are regulating and people who have actually lent some money to real people. The surfeit of civil servants and newly graduated inexperienced staff is a problem. It’s a bit like asking an ENT specialist to carry out brain surgery!

  3. The Cynical Broker 17th February 2014 at 12:04 pm

    Ken, since when has the FCA, FSA or any other regulator ever live in the real world! Perhaps regulation would be more realistic, if it were put together by people who actually have a mortgage, have financial worries, and who when their company is deemed not fit for purpose, don’t just get transferred to the new improved version, to effectively carry on doing the same job as before, probably for more money !

  4. The FCA and BofE have emphasised that limiting borrowing – ie on mortgages, loans and credit cards is a tool they will use to restrict lending and control a spiralling rise in house prices, rather than raise interest rates which will be disastrous with a fragile economy.

    Restricting borrowing and lending is a good thing for people who borrow – but not good if you don’t qualify.

    Buying a property these days means that many are saddling themselves with huge debt – with no consideration for rising interest rates and the impact that will have on borrowers and the UK economy as a whole.

    Grey haired underwriter – time to start looking for a new job if you are worried about just a few good lenders remaining.

  5. GP Styles (GPS Economics) 17th February 2014 at 1:34 pm

    This is the tip of the iceberg. Far more stress testing and scenarios to come. The regulator is keen to avoid being seen as complacent…

  6. Grey Haired Underwriter 17th February 2014 at 4:21 pm

    Ancient Wisdom – I didn’t say GOOD lenders I just said large lenders. Fortunately I am of an age where I can retire should I wish but I worry for the next generation who will simply be told ” the rules say you can’t afford the loan”.

    Ohh and it’s not my job I worry most about but those of the hundreds of brokers who won’t be able to make a living

  7. The problem I see is that those with large mortgages now will be excluded under new affordability rules making them the same as those with interest only mortgages now. Lenders will be forced to turn down remortgage applications even though borrowers are paying the mortgage leaving them at the mercy of their existing lender.

    Another unintended consequence!

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