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Underwriting warning over affordability and self-cert

Brokers have warned that the FSA’s proposals for a clampdown on self-cert mortgages and more stringent affordability checks could lead to case-by-case underwriting, resulting in higher costs for borrowers.

First Action Finance head of communication Jonathan Cornell says that as affordability criteria gets more complex, lenders will have to assess a lot more individuals on a case-by-case basis.

Cornell says: “If you are starting to look at more complex models, then it is going to get harder and harder and we may end up going back to a system where there are underwriters assessing affordability on a case-by-case basis.”

Mortgageforce managing director Kevin Duffy says banning self-cert is “groundhog day” for the industry and it is going back to the days when each mortgage had to be manually underwritten. He says this will increase the burden of costs on the lender and this may well be fed back to the consumer in the form of higher fees.

He says: “There is no doubt that by kicking self-cert into the long grass, the industry has taken a step backwards. The cost of putting a manual underwriter back into the chain will quite possibly be passed back to the broker and consumer. But it would still be a price worth paying for frustrated customers struggling to get a mortgage.”

Quantum managing director Jonathan Burridge says: “There is a risk that there will be a great deal of money that lenders will need to spend on putting the FSA’s requirements in place and this will ultimately be passed back to the consumer. However, I think it may be reflected in rates rather than fees.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. I have to say that to me the abolition of self cert. mortgages seems to be a very healthy step forward, albeit chronically late, as is most of what the FSA does. Why would anyone applying for a mortgage not want to disclose their legitimate income to prove affordability?

    Some commentators have pointed out that this will hurt company directors who, for the purposes of tax efficiency, draw most of their remuneration in the form of dividends rather than salary. Okay ~ so go to a lender who is prepared to take dividend income into account in determining affordability. Surely there must be a few?

    I’m not a mortgage adviser (thank God), but I really don’t see what all the fuss is about.

  2. Let’s be realistic here. The majority of lenders already have robust processes in place to handle income verification cases and these are not neccessarily overly onerous nor do they require a significant amount of manual intervention.

    Commenting on Mr Stevens earlier point, I do not know of any mainstream lender who will not take dividends into account. All that is required is some form of legitimate confirmation – SA302, Accountants confirmation, access to the accounts etc.

    With regard to passing on costs to the end consumer – surely just scaremongering to justify retaining what has clealry been a dubious practice historically. There is significant evidence to prove that income verified mortgages are lower risk and that means lower losses, fewer collections staff and, in turn, a lower capital requirement thus surely enabling better rates.

    Self cert whilst valid for a small proportion of individuals has been abused by Brokers, Lenders and Consumers – all blaming each other – to conceal the true earnings of a consumer and thereby result in the bad debts we see today.

  3. I actually agree (I know me agreeing with the FSA shock horror) with a lot of the mortgage review paper. All they are saying is that income verification is necessary and that anything which may be considerd an estimiate is “plausable”. In order to monitor plausability, both mortgage advisers and underwriters should join advisers as regulated individuals on the FSA register and not just mortgage advisers.
    And for the record, I am a qualified mortgage and equity release adviser, my firm IS authorised to provide mortgage advice and I am personally on the FSA resgiter as I am primarily an IFA first and foremost.
    Self cert was an accident waiting to happen. Even if closing the gate after the horse has bolted, the verification and plausability method does not mean people who struggle to demonstrat historical income will NOT get a mortgage, just that all evidence will need to be verified and more importantly be plausable and what is plausable forecasts must the be affordable.

  4. The FSA is only running around like a scalded cat because it is trying to catch up and thereby justify it’s continued existence.
    When it took over regulation of mortgages it knew next to nothing about the market and currently is only part way through a steep learning curve.
    With all this thrashing around anyone would think that the UK mortgage market caused the credit crunch and banking crisis.
    The UK does not have the same mortgage market as the US and telling lenders what they can an cannot do, with this micro regulation, will disenfranchise a significant section of the population. Another example of the ‘nanny’ state in which overpaid bureaucrats tell the great unwashed what they will and will not be allowed to do, for their own benefit of course, all sold on the basis that it protects the consumer!
    Really it’s just regulate – regulate -exterminate oops! slipped into Dalek mode.

  5. Vic Jannels - AToM 31st October 2009 at 10:11 am

    I am interested that some of the comments made, supporting the abolition of self cert, are from people not in the sector. This seems a little like me suggesting that brain surgery should be undertaken using a hammer and chisel! What do I know? What is certain is that there are good reasons for the retention of self-cert for some clients. I would agree that for the employed there does not seem to be an argument unless they have additional (self-employed) income and the production of year end audited accounts does not happen to match the timescales. However, horses for courses rules should apply here and, subject to dilligent action on the part of the selling intermediary and tight underwriting on the part of the lender, there will remain a place for this type of lending. History shows that the act of throwing the baby out with the bath water can have dramatic effects. In this case undoubted increased costs for the borrower. I encourage all stake-holders to follow this path carefully and make a reasoned decision as, once closed off, it will probably be impossible to re-visit this area of mortgage lending. That might prove to be a major mistake!

  6. Michael White CEO Email Mortgages 2nd November 2009 at 11:43 am

    Fascinating how the ‘non’ mortgage people seem to comment in the same way time and again. Generally, talking ralative twaddle about matters which they read about in the papers…Priceless!

    Not only are brokers making comments regarding increased cost for ever tightening underwriting risk control, such comments have also recently been made by Fitch. So, can we please just get real on this matter of self-cert and avoid the fairytale world the FSA would have us believe exists!

    Banning ‘self-cert’ completely is simply nonsense. Such action will essentially exclude the very entrepreneurs which aid the recovery for a country when emerging from a recession, as was the case in the early 90’s. Yes, there can be extra vigilance imposed; in the shape of self-employed only and restricted LTVs etc, but to remove the product completely bears no reflection on the facts, even the FSA acknowledge in the MMR that, ““…the market has worked well for many consumers: the vast majority of mortgage borrowers will come through this recession meeting their mortgage payments and keeping their homes”.

    Please note, a not insignificant number of these mortgage borrowers will have obtained self-cert mortgages. We should not forget, again using the words of the FSA, “A lot of people now own their own homes (many of them outright) when previous generations would never have been able to do so.They will consider that they have been well served by the mortgage market in the UK”

    Very true indeed, and we should endeavour to maintain this approach in a structured positive manner rather then using what might be described as heavy handed negative approach (By way of an analogy, judging by recent comments and considering the aims detailed, the FSA and its in experienced followers appear to think that the best way to address certain ‘wounds’ is to simply amputate. …I suppose life can continue without a limb, but my concern extends to the belief that such amputation might include one’s head!).

    I did also note in the MMR paper that one of the basis for assessing affordability is “the plausibility of the information obtained” Which I optimistically suppose leaves some opportunity for a robustly structured Self-Cert product to remain? ….The more experienced among us in the market certainly hope so.

  7. It seems the FSA are far too concerned about self certification, but are failing to grasp that people are not getting into arrears because of the type of mortgage they were sold. It has resulted because they have no funds to draw upon if they lose their job and inevitably stop paying their mortgage.

    Logic suggests that new loans should only be offered with proof of savings or, more likely, a short term income protection policy in place. Those of us selling these have had a good deal of pressure applied by the FSA to ensure the sales process and policy terms are cleaned up and customers treated fairly. So lets see the FSA support the industry by making holding and maintaining one of these policies part of the acceptance criteria for any good mortgage rate.

    I would argue that a self employed individual with self certified mortgage backed by an income protection policy (ASU) is a better bet to continue to afford to pay that mortgage than someone with a standard mortgage and, quite likely, has even less money in the bank.

    The FSA banned single premium MPPI because of how it was sold, not because MPPI is a bad product. Give people the protection of a half decent income protection product, bought separately, paid monthly and portable. It will keep far more people in their homes than artificially eliminating a sensible mortgage product for those who need it.

  8. I think this is totally unreasonable. Both my partner and I are self employed with 3 children, attempting to get onto the property ladder and this was just the most awful news I could have ever heard. If people are stupid enough to ask for a mortgage that they know they can’t afford then that’s through their own stupidity, we know we can afford it but we don’t have the 3 years worth of accounts to prove it. It’s just simply unfair as we had reached the point when we thought we could and now it’s just been snatched away from us.

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