Mortgage brokers breathed a sigh of relief last week after the Turner review stopped short of imposing capped loan to value ratios on mortgage products, although they are still under consideration.
In the report, Turner says any regulation on retail products, particularly mortgages, would be “premature” but there still needs to be debate on the issue.
The paper says the “rapid extension of mortgage credit” was a key contributing factor in the financial crisis, so the FSA will carefully monitor mortgage products in the future. But it warns that a cap on LTVs could jeopardise the consolidation of debts which could help struggling borrowers. It also says that by limiting income multiples, the “democratisation of homeownership” would be adversely affected.
But the report does warn that, without intervention, rising LTVs and income multiples could affect the solvency of the banks lending such mortgages. It also says that, without mortgage caps, the “boom and bust” cycle may continue.
So mortgage capping has not been ruled out for the future. If the FSA does opt to take a Draconian stance, what could be the consequences for intermediaries and consumers?
John Charcol senior technical manager Ray Boulger says the short-term decision not to cap mortgages is great news but if the FSA decides to cap income multiples and LTVs later down the line, it could have a hugely detrimental effect on the mortgage market.
He says: “A mortgage cap could have horrendous consequences, both for individuals and the UK economy as a whole. From an individual point of the view, a large proportion of people would not even be able to buy their first property, could be unable to move and even unable to remortgage. For the UK economy, it would have an extremely negative effect because property transactions are such a crucial part of econ- omic activity.”
Association of Mortgage Intermediaries director general Chris Cummings says the regulator has a lot of hurdles to overcome before it puts any restrictions on mortgage products.
He says: “If the FSA does limit loan to values and loan to income multiples, what does that mean for existing borrowers? There will be people who have income multiples above three times, who may have taken out a fixed rate at four or five times their income. Does that mean the rules will only be for new borrowers? Or will it apply to existing borrowers too? Will lenders be forced to treat categories of customers differently? Will this be treating customers fairly?”
Cummings also questions how a cap would work with offset flexible mortgages, which allow borrowers to have fluctuating LTVs. “Regulators mess with the mortgage market at their peril,” he warns.
The Turner report also proposes the regulation of buy-to-let mortgages. Brokers think this too could be perilous.
Mortgages For Business managing director David Whittaker says: “It would be very difficult for the FSA to come up with a vanilla solution to such a multi-faceted task. Someone who buys a sole buy-to-let property to extend their pension fund might need protecting but someone who owns 350 properties would arguably know more about buy to let than the regulator.
“I am not quite sure if a rule would be workable without making the sector too complex.”
The report also hints at regulation of secured loans. This draws support from those working in the first-charge mortgage sector. Money Workout managing director Matt Andrews says the FSA should have regulated the sector years ago. “Regulating second charges will push out the bad brokers,” he says.
If all the mortgage restrictions became reality, how would they affect intermediaries?
Andrews says: “It would be sudden death to the broker. It is already horrendous trying to get transactions through. With further restrictions, it would be impossible.”
He argues that the huge majority of people are looking for mortgages beyond three times salary: “I cannot see how a cap would work,” he says. Andrews argues that the average borrower would not be able to remortgage if the cap was put in place.
He also says a limit on income multiples would create technical difficulties: “I only know of one or two lenders who use income multiples, the vast majority of mortgages are consid- ered on affordability calculations.”
We will not get a clearer view on how the FSA intends to regulate the mortgage sector until September when it is due to publish its mortgage conduct of business review. But whatever it decrees, the mortgage market will have to expect a more intrusive, more regimented regulator that will be keeping a very close eye on all participants.
Cummings concludes: “The FSA needs to think very, very carefully about any proposals because the market has been working really quite well for the vast majority of borrowers in the UK.
“Some of Turner’s suggestions seem to be assertions with very little proof about why these steps are needed in the standard mortgage market – is Turner saying that the FSA’s responsible lending rules, which we have been following for five years, do not work?”