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Is it a dead cert?

Self-certification Nicola York looks at whether self-cert business will decline as firms bring in new affordability calculators

Brokers and lenders are divided over whether the self-cert market is set to decline as a result of new affordability calculators being introduced by many lenders.

Mortgages plc has noticed a change in its business split since it introduced its new affordability model. Head of marketing Julian Wells says self-cert applications as a proportion of Mortgages plc’s business has fallen by over 20 per cent since last year. But Wells says the actual volume of self-cert applications has risen despite his opinion that advisers are wary about selling self-cert products.

He says: “The FSA is still struggling to see why an employed person would be using self-cert. But our affordability model ha been massively popular and our sales team say brokers love it.”

According to Wells, brokers have told Mortgages plc that they like the new affordability calculators because it means they can avoid self-cert as an option and he says some brokers are “desperate” to avoid the sector.

He adds: “I think self-cert for the employed is likely to be dipping at the moment but the self-employed market is hugely popular and is a massive sector which will keep the self-cert sector buoyant.”

London & Country head of communications David Hollingworth says Mortgages plc’s changes in business split suggests to him that there has been abuse within the self-cert sector.

He says: “Since affordability models have been put in place, it has tied in with the drop in self-cert applications which suggests to me that self-cert was not being used correctly. Surely, the only reason that you would see self-cert drop is if it was being used to exaggerate income?

“Self-cert has definitely been abused. Brokers are potentially, or have been, misusing it. They have been trying to service what the client wants but not necessarily going about it in the right way.”

The FSA found mixed results for brokers after its investigation into the self-cert sector last November. In supervisory visits, the FSA found that in 47 per cent of 249 cases reviewed the broker firm was unable to demonstrate that it had appropriately assessed affordability.

In 36 per cent of cases, no reason was given or the reasoning was unclear as to why a self-cert mortgage had been recommended.

FSA spokesman Robin Gordon Walker says the issues were mainly around record-keeping and there was no evidence of systemic fraud by brokers relating to income inflation.

He says: “The ideal situation is that we get down to nil cases of abuse and prevention is better than cure. We are not against self-cert if it is being used appropriately but people should not be abusing it.”

Platform head of marketing Paul Hunt says self-cert business has remained steady over the past 12 months and he believes the main issue in the sector is adequate record keeping rather than abuse.

He says: “There are reasonability tests in place to ensure that the income correlates to the consumer’s occupation. The FSA has said record keeping needs to be improved and lenders and brokers have a responsibility to ensure those processes and checks are in place to ensure the customer is being treated fairly.”

BM solutions says gross self-cert applications have risen by 25.4 per cent in the first quarter of this year compared with the same period in 2005.

BM Solutions head of PR Matt Grayson says: “The self-cert market is a lot bigger than we thought it was going to be and is very buoyant at present. We have absolutely seen no decline and the number of applications that we had last week has run on record levels.”

CBK mortgage adviser Peter Wright says brokers have been too quick to go to self-cert in the past and wonders whether brokers are taking a higher proc fee with no confirmation of income. He believes the self-cert market will decline naturally as lenders introduce more flexibility and relax their requirements for borrowers.

If the self-cert market does begin to dwindle, Wright believes it will increase competition and so consumers will see better deals coming out as a result. He says some consumers have a misconception of what self-cert is for which does not help the market.

Although he is well disposed towards affordability calculators he does have some reservations. “It is very difficult to know who will do what unless lenders provide us with information on their affordability calculators. It makes more work for the brokers which may mean lenders will miss out on business because brokers may be inclined just to go to the lenders they know.”

Alliance & Leicester head of intermediary mortgages Mehrdad Yousefi agrees with Wright that there will be not be much growth in the self-cert sector. He believes this will be caused as a direct result of more lenders focusing on affordability lending.

There may be a tiny minority of consumers who exaggerate their income, in Yousefi’s view, but he is adamant that if the lender and the broker make appropriate checks, then this will eliminate these cases.

He does not believe the self-cert market will decline hugely and thinks there will always be a place for these products with self-employed people.

He adds: “Maybe there was opportunity for abuses in the past but I think these opportunities will be lessened.”

Mortgage Express head of distribution Tim Sturley says the volume of self-cert business has doubled in quarter one of 2006 compared with the same period in 2005.

He says: “The self-cert market is growing at such a pace and it is inevitable that it will continue to grow as it becomes increasingly common for people to have more than one job or to be self-employed.”

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