The overriding principle of the mortgage market review is that banks should not lend to borrowers who cannot afford a mortgage based on a belief that property prices will rise, according to FSA chairman Adair Turner.
Giving evidence to the Treasury select committee last week, Turner said this is the first time the FSA has addressed the issue of lenders advancing money in the hope that house prices will go up. He said: “We have not previously said it is not ok to lend money against the expectation of rising prices.
“Though the MMR is hundreds of pages long, this is probably the single biggest principle there, which is it is not OK to lend money knowing the person cannot afford to pay it back but everything will be ok because house prices are going to go up. It was the problem to a degree in the UK and was the absolute core of the US sub-prime disaster.”
London & Country associate director of communications David Hollingworth says: “We can already see the effect the MMR is having on lender criteria, with the new proposals already causing lenders to make changes especially on interest-only criteria. We have also witnessed lenders less willing to lend at higher LTVs and there has been a general tightening of criteria all round.”
Chadney Bulgin mortgage partner Jonathan Clark says: “The mortgage market review will put a stop to more relaxed lending practices where lenders were taking a bet against rising house prices.
“But it would be a shame if this killed off higher LTV lending as first-time buyers would be at a disadvantage.”