Focus on sub-prime risk is out of date and wrong-headed
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I was interested to read last week that the regulator is calling for stricter affordability tests and a disposable income buffer for borrowers with impaired credit.
My first question is how many sub-prime lenders are in the market today and how many new ones are likely to come in?
The answer is hardly any, so the focus on sub-prime risk at this time is seriously out of date.
Second, any organisation lending money for any reason should bear the risk by basing its decision to lend on its own criteria rather than a set of regulatory rules that effectively remove decision-making.
I’m all in favour of regulation and know that a fair percentage of borrowers who now have payment difficulties were sub-prime cases.
But sub-prime lenders’ decisions to lend were based on getting more business in rather than making it easy for their clients to afford mortgages.
The simple answer is for lenders not to offer a mortgage or loan to anyone who has had any form of adverse credit in the past five years and for them to be more rate competitive in the mainstream market, making no distinction between direct and broker sales.
Then we could base lending criteria on monthly payments not exceeding 85% of basic net monthly income after deduction of other credit plus a standard monthly living allowance. And tax credits should not be considered as income if they represent more than 25% of basic income.
This way, all mortgage applicants would be from the upper reaches of society, thereby eliminating risk. That would keep lenders and regulators happy which is what counts, isn’t it?
MAURICE EDGINGTON
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