Fear of being sued makes lenders toughen criteria
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Fears that they could be sued if a borrower’s repayment vehicle fails to pay off their interest-only mortgage are behind lenders’ recent criteria changes, trade bodies have claimed.
The Council of Mortgage Lenders and the Intermediary Mortgage Lenders Association are warning that proposals in the Mortgage Market Review could pave the way for lenders being sued should the repayment vehicle not cover the mortgage balance at the end of the term.
The Financial Services Authority’s latest MMR paper, published in December 2011, puts the onus on lenders and says they must judge whether the repayment vehicle has the potential to repay the mortgage.
John Heron, chairman of IMLA, says that if a lender is expected to check the appropriateness of a particular vehicle, it raises questions aboutwhere the responsibility lies if it fails.
He adds: “If it is going to be judged in retrospect, will lenders have been expected to assess the robustness of the repayment vehicle according to information at the time or future considerations?
“You can understand why lenders are likely to address this by constraining their criteria.”
Meanwhile, in its latest News & Views newsletter, the CML warns: “The FSA clearly states that ‘the repayment of a mortgage is the ultimate responsibility of the borrower’.
“But borrowers and the Financial Ombudsman Service will need to clearly understand that despite lenders having to assess the probability of the chosen repayment method meeting its target, borrowers, not lenders, will actually be responsible for the repayment method they choose.”
Ray Boulger, senior technical manager at John Charcol, says lenders are not willing to take the risk.
He says: “The MMR puts so much responsibility on lenders to ensure any investment plan will produce sufficient funds to pay off the mortgage that they are understandably not prepared to take the risk of being sued by borrowers for any shortfall.”
Last week, Lloyds Banking Group announced a string of interest-only restrictions. It will no longer accept cash savings, including ISAs, as a suitable repayment vehicle.
It also placed restrictions on using stocks and shares as a repayment vehicle and specified that pensions must have a minimum current value of more than £1m.
This followed Santander reducing its maximum LTV for interest-only from 75% to 50% the previous week.
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Readers' comments (16)
Hardy | 20 Feb 2012 9:25 am
Another fine mess you got us into Stanley, oh I mean Hector.....
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Paul Cullen | 20 Feb 2012 9:32 am
Great Britain 2012. ! What a State !
Through the F.S.A. the 'nanny state' philosophy is now introduced into retail business.
Many many people chose an 'Interest Only' mortgage as it allowed affordability in getting on the housing ladder.A base could be built for rearing a family.The economy benefited as money was spent on homes not going into landlords bank accounts.What is the difference between having an affordable 'interest Only' mortgage or a much less affordable private rental property ?
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Anonymous | 20 Feb 2012 10:25 am
If you can't afford to repay a mortgage on day 1 you can't afford the mortgage. Interest only is not an affordable way onto the housing ladder it is an affordable way into arrears. Interest only arrears are much worse than repayment arrears, fact.
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Anonymous | 20 Feb 2012 11:36 am
"The economy benefited as money was spent on homes not going into landlords bank accounts."
This comment is astonishing. Do you actually understand how an economy works? And you are advising people on major economic decisions like taking out a mortgage? Scary.
As the last post says, IO is not a sensible way to "get on the housing ladder". All the pople who took this approach ten years ago during the boom, while making no provision to pay off the capital, will be in for some tough times in the future. Although no doubt the taxpayer as a whole will have to bail them out for thier poor borrowing choices, as we can't have people losing thier houses through nobodies fault bu their own, can we? Sigh.
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Grey Haired Underwriter | 20 Feb 2012 11:58 am
Paul's comments show exactly what is wrong with Interest Only. A mortgage is a contractual loan not a tenancy agreement. The capital has to be paid back at the end of the term and there is nothing 'nannyish' about this. It is the simple fact that borrowers were given the impression that IO could go on forever that is creating the problem and the FSA have decided to face this by laying off the responsibility on the lender. It is about time that all parties took responsibility for this type of lending and that includes the borrower and the seller.
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Maurice Edgington | 20 Feb 2012 12:13 pm
There should be a clear decision on whether the lender is expected to take responsibility for an underperforming repayment vehicle. I doubt if there will be because what looks as though it could perform well today could be completely different in say 5, 10, 15 or 25 years. Clever lawyers would get their lender clients out of responsibility if a case ever came up. Why would an IFA who sold the investment not have to bear some responsibility? In the meantime interest only mortgages when rates are so low do not give much cash flow into lenders so perhaps that is the real key to restricting interest only products.
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Glen McKeown | 20 Feb 2012 12:48 pm
They say that the pendulum swings both ways - automatically. We had a tight mortgage market that gradually loosened into something that started to resemble a garden party. Then someone took all the money away, and the party stopped. And the recriminations began. This tends to bring out the puritanical element, those who hated the previous freedoms. So now they take their revenge by imposing a regime of cold baths and floggings.
The garden party was not a sensible way to manage the mortgage market, with its massive level of self indulgence, but that does not mean that the puritanical spirit is any better. Creating a situation were it is possible to sue for not being able to read the future correctly suggests a lack of connection with reality.
Wouldn't it be nice if, instead of light touch and heavy touch regulatory regimes, we had an intelligent touch regime, that regulated the extremes and let the main body get on with meeting market needs.
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Luke Atkinson | 20 Feb 2012 2:11 pm
All of you need to look on the back of the best selling daily tabloid this week - there are claims firms actively marketing people who have:
- Been sold a sub prime mortgage and have never had any adverse credit.
- Been sold a mortgage and added an ERC to the new balance.
- Been sold a mortgage and not told about the fees that were added to the loan.
- Been sold a mortgage on Interest Only and who have no form of repayment vehicle.
You think PPI was a dent in your Ombudsman allowance? Wait until this hits the fan.
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Mike Davies | 20 Feb 2012 3:45 pm
If a lender has to check the potential of an investment product as a repayment vehicle, isn't that investment advice? Does this mean that an authorised individual will be required to carry out that review? I'd be reluctant to review a product sold by someone else.
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Shaks | 22 Feb 2012 1:15 am
Lenders are ripping off cutomers. If they were forced to limit thier margin over the Bank of Rothschild Base Rate, to say a maximum 2% then perhaps more people could afford a repayment mortgage. This increased activity would help the economy grow again. The facts on the gound are that too many can't afford IO but would rather buy on IO than pay rent. Not ideal but that's the relaity. You are free to decline these clients I must add.
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