Mortgage brokers and the Association of Mortgage Intermediaries have backed the Intermediary Mortgage Lenders Association over claims that the FSA has “seriously underestimated” the impact of the mortgage market review on future lending.
At the Building Societies Association annual conference in Manchester this month, Imla executive director Peter Williams made the case that the impact of the FSA’s responsible lending rules will be greater than the regulator predicts, with a knock-on effect being felt on the housing market overall.
The FSA’s cost-benefit analysis of the MMR, published in December, estimates the reforms will reduce mortgage lending by 2 per cent in subdued market conditions and 10 per cent in boom times.
Williams said: “One concern of the MMR is that the cost-benefit analysis seriously underestimates its impact. I suspect the MMR will bite tighter and deeper than the FSA expects.”
Ami director Robert Sinclair says the MMR is not the only issue lenders have to contend with when pricing mortgages. Basel III and the capital requirements directive are forcing lenders to hold more capital and more liquid assets. When taken together with the MMR, the availability of mortgages is likely to reduce further.
Sinclair says: “The FSA sets out what impact the responsible lending rules would have on the market based on its belief these requirements would not stop people borrowing but it would reduce the amount they could borrow.
“However, the way we see it is if someone is faced with the fact they can only borrow a lesser amount, we think they would not transact at all, as opposed to the FSA’s thinking that people would just transact at a lower level. That is the concern and that is why we think there will be a bigger impact on the market than the FSA is suggesting.”
Coreco director Andrew Montlake notes the true impact of the MMR is not simply a case of the rules themselves but lenders’ reaction to those rules and how proportionately they are applied.
Montlake says: “A lot of the changes lenders are making to their lending criteria, for example, with interest-only mortgages, do not reflect the proposals as written in the MMR. At the moment, lenders are going further than the rules have prescribed. The real effects of what the FSA is suggesting are therefore likely to have been underplayed.”
The FSA’s December paper, which set out its proposed mortgage reforms, does not go as far as calling for a ban on interest-only mortgages. Instead, it stipulates that affordability may be assessed on an interest-only basis where the lender has evidence that the prospective borrower has a credible way of repaying the mortgage.
However, in practice, this proposal has translated to lenders either pulling out of interest-only lending, dramatically reducing maximum loan-to-value ratios on interest-only or tightening their criteria.
Co-operative Bank stopped offering interest-only lending to residential customers earlier this month. Since February, a total of 14 lenders have imposed stricter criteria on interest-only mortgages, including Lloyds Banking Group, Santander and Royal Bank of Scotland.
John Charcol senior technical manager Ray Boulger says: “I would agree the FSA is under- estimating the impact of the MMR. In a bad market like we have now, the impact is already substantially greater than the FSA is suggesting. It is reasonable to assume that without the MMR, some of the recent changes in policy we have seen would not have happened.”
Boulger says as big lenders start making changes to their affordability criteria that go further than the MMR, smaller lenders have no choice but to follow suit. He says he has heard smaller lenders say they did not to want to tighten their criteria but have been forced to do so to avoid being “the last man standing”.
He adds: “The MMR proposals are already having a substantially greater impact on lending than a 2 per cent reduction and if and when we get back to a mortgage market where there is adequate funding, then the impact will probably be greater than 10 per cent.”
Sinclair says: “The cost-benefit analysis has some foundation in fact but it is still a set of assumptions based on assumptions.
Therefore, it is, at best, informed guesswork.
“The 2 per cent is more likely to be at least 4 per cent and that 10 per cent is more likely to be 15 or 20. But even when you move the cost-benefit analysis by those percentages, I do not think the figures are a strong enough argument to convince the FSA of not doing what it wants to do.”
Sinclair explains that even given the above margin of error, the FSA is committed to its MMR reforms as it believes the “positive net benefit” of preventing people from taking on mortgages they cannot afford and getting into arrears outweighs the fact that more prospective borrowers would be denied a mortgage they would otherwise be able to access.
Montlake says: “There are a lot of people that will be affected if the MMR’s responsible lending rules go ahead as planned but the mortgage market has a funny way of adapting and moving forward.
“It is in the hands of the lenders to work with borrowers and brokers to ensure affordability criteria do not go beyond what is stated in the final rules.”