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Self interest

In the mortgage industry, there is one strong theme that runs through all the regulatory moves of the past few years – from the mortgage code and compulsory qualifications for advisers through to the FSA taking over full regulatory powers by the end of August 2002 – and that is the concept of “responsible lending”.

When making any smaller-value purchases with cash (for example clothes or household goods) consumers must choose carefully for themselves and – so long as the seller has kept within the law and the goods are of serviceable quality – they only have themselves to blame if they are dissatisfied with what they have bought.

However, when it comes to borrowing money to pay for these things, it has long been acknowledged that consumers need extra protection and the Consumer Credit Act provides this. Similar protection is now being put in place for higher-value loans secured on people&#39s homes, with regulation by the FSA pending.

The amounts involved in house purchase and remortgage are by far the largest that most individuals will ever borrow in one sum and lenders have always had a number of safeguards in place to underpin responsible lending.

In the first place, regarding the property used as security for the mortgage loan, surveyors&#39 reports must be produced to show the property is actually worth the amount that is being claimed.

Second, borrowers (in most cases) are expected to provide a proportion of the purchase price themselves in the form a deposit. This investment in the property gives lenders comfort that borrowers are sincere in their intentions to act responsibly and make repayments on a regular basis.

The lower the proportion of the purchase price that the lender is asked to provide (loan-to-value ratio), the better the deals that will be on offer to customers.

The third safeguard of responsible lending is the assessment of “ability” to pay. Traditionally, borrowers have been obliged to provide proof of stable employment and income levels to satisfy lenders&#39 requirements – normally payslips or, if self-employed, consecutive sets of audited accounts.

However, as employment patterns change and many more workers join the ranks of the self-employed, the concept of self-certification of income has been developed by a number of specialist lenders in order to help this growing sector to obtain a mortgage.

To put this into perspective, there are 3.16 million self-employed people in the UK – equivalent to 11 per cent of the total working population of around 28 million. Six million people work in part-time jobs and 1.7 million are on temporary contracts.

Those specialist lenders who have been at the forefront of developing and implementing self-certification over the last decade or so have gained a great deal of experience and expertise in this particular field, with underwriters and credit scoring systems geared up to self-certification business. To this extent, they have been able to build up the ability to maintain responsible lending.

However, it must be acknowledged that self-certification loans are different. Products tend not to attract the same level of keenly-priced discounts and fixes that full status applicants have come to expect. Often the LTV is also restricted.

Now, even mainstream lenders are starting to offer self-certification products because they offer the chance of more profitable business in a market where keen competition has driven down profit margins on mainstream products.

Mainstream mortgage len-ders have not traditionally had an appetite for this category of lending. If their appetite for higher risk lending is developing, initially will they be able to underwrite the business in a way that the intermediary market expects?

With UK insolvencies alr-eady at a six-year high, we may well be facing a full-blown recession in the aftermath of September 11 and the subsequent stockmarket slides and redundancies.

In any recession, smaller businesses and sole traders are those most at risk of business collapse – this is the sector that makes up the bulk of the self-certification mortgage market.

If recession results in widespread failure of self-certified mortgages, the industry may face questions about self-certification lending criteria, so this is a time for both lenders and advisers to be extra vigilant about self-certification lending.

However, taking the optimistic view, the market now is different from the early 1990s, where recession, combined with a property market crash, caused huge amounts of arrears and possessions.

Even niche lenders now have sophisticated and reliable credit scoring systems and there are many data sharing schemes for personal credit profiling and fraud prevention – so applicants are also effectively screened for their “willingness” to make payments.

I firmly believe that mortgage advisers must also play their part in responsible self certification lending because, in my view, they have an ongoing duty of care to their clients. Advisers need to keep some simple principles in mind when it comes to submitting self certification cases.

First and foremost, applicants whose self-certified income seems on the high side need to be made aware that any perceived overstatement of incomes will be weeded out by lenders&#39 underwriting processes.

In addition, all lenders offering self-certification will specify corroborative evid-ence of the applicant&#39s good payment record so applicants must be prepared to provide this if requested.

Responsible advisers who become familiar with the lenders&#39 self-certification und- erwriting process can gain expertise that will help them to introduce more loans successfully and continue to do profitable mortgage business within the increasingly regulated climate that now prevails.


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