MMR: Income buffer for sub-prime borrowers
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The Financial Services Authority is calling for stricter affordability tests and a disposable income buffer for borrowers with impaired credit as part of a major shakeup of sub-prime.
In the FSA’s Responsible Lending paper, released today, the regulator says it looked at the performance of some 4.35 million mortgages between Q2 2005 and Q1 2009 by 33 lenders, examining which characteristics were the strongest predictors of arrears and repossessions.
The dominant factor it says in all high risk lending combinations was the borrower having an impaired credit history - anyone in either three months arrears, with one or more County Court Judgement or someone with an individual voluntary arrangement.
Data from Citizens Advice Bureau also found that of borrowers who got into arrears, 52% had a debt that would not show up on a credit score.
The FSA says: “While there is little that we can do to prevent the occurrence of life events, we think it appropriate to take action to reduce the likelihood that credit-impaired borrowers will get into difficulty repaying the mortgage.”
As a result it’s looking to build a buffer for debts that don’t show up on a credit score.
The FSA is uncertain exactly how the buffer could work in practice, but one suggestion would be to subtract a percentage from the borrower’s disposable income.
So if a borrower had £1,000 of disposable income that borrower would only be able to take out a mortgage with monthly payments up to that £1,000.
If the borrower was credit impaired the FSA could subtract 20% from that amount, so rather than being able to borrow £1,000 the sub-prime would only be able to afford £800.
But the FSA is looking to start a debate about what a suitable percentage would be.
Its own data analysis has shown that sub-prime borrowers are on average in arrears on their mortgage payments by 14% within the first 24 months of their mortgage.
The FSA says: “This could suggest applying a buffer of 14%. However we have concerns about using this as a basis for determining an appropriate buffer as it is based on historic and incomplete data.
“The average amount by which debts are under-reported in credit records could be another appropriate basis, though this may be difficult to establish.”
It adds: “We would welcome views on this to help us determine an appropriate basis for such a buffer and how it could be set.”
Readers' comments (6)
GMS | 13 Jul 2010 10:03 am
Well done FSA there goes TCF out of the window. "I am sorry sir because you have a CCJ you cannot borrow in the same manner as everybody else" How can this be fair? The fact that somebody has adverse credit will mean their rate will be higher which is the price to pay for past problems. To add a further penalty is a disgrace and shows how far removed from reality these clowns at the FSA are. If a prime borrower can use all of their disposable income to cover the mortgage why not anybody else? Nobody at the FSA has ever made a mistake in the past I take it? We have just had the worst recession in living memory for goodness sake, how many people have through no fault of their own become classed as credit impaired?
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Anonymous | 13 Jul 2010 11:34 am
Oh my God! Here we go again. Big Brother, AKA the FSA/BoE, now want to dictate to the Lending fraternity how to lend, how much to lend, whom thay can lend to, how much disposable income is actually 'disposable'etc. etc.
Borrowers who have been unlucky enough to fall on hard times in the past will be stigmatised even further as they are categorised as 'Sub-Buffer'. A whole new segment of the market!!
What happened to 'light touch' regulation? what happened to 'principles based' regulation?
Pretty soon, if Joe Public wants to arrange a mortgage, he will only be able to do so whilst his hand is held by a member of the FSA. Poor old Joe, led by the hand to a Bank of the FSA's choosing, told what his disposable income is, what product he can have and how lucky he is to be looked after so well by the FSA! Perhaps they should set themselves up as mortgage advisors? There would be no need for mortgage brokers or intermediaries, just a cosy relationship between the FSA and the Banks...........
Dear Mr. Orwell, should we have ever doubted you?
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Mixxster | 13 Jul 2010 11:56 am
So this is based on historic and incomplete data.
Get a grip - go and get some complete and current data and then make your findings public. clowns!!!
If I based my advice on hisoric and incomplete data the FSA would fine my ass.
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Maurice Edgington | 13 Jul 2010 12:46 pm
My first comment on this is to ask how many sub-prime lenders are in the market as at today and how many new ones are likely to come to the market? The answer is hardly any so the focus on sub-prime lending risk at this time is seriously out of date.
Secondly any organisation lending money for any reason should bear the risk by basing their decision to lend on their own criteria not a set of regulatory rules that effectively remove the decison making.
I am all in favour of regulation and I do see that a fair % of borrowers who have payment difficulties were sub-prime cases but like large banks that reached the edge of almost failing the sub-prime lenders decisions to lend were based on getting more business not making it easy for their clients to afford their mortgages.
The simple answer is for no lender to offer a mortgage or loan to anyone who had any form of adverse credit in the past 5 years, allow lenders to be more rate competitive in the mainstream (with no destinction between direct and intermediary sales). Then base the lending criteria on monthly payments not exceeding 85% of basic net monthly income after deduction of other credit and an industry standard monthly living allowance, tax credits no longer to be considered as income if they represent more than 25% of basic income. Then all mortgage applicants would be based in the upper levels of society thereby eliminating all risk. This keeps lenders and regulators happy which is all that counts...is it not?
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GMS | 13 Jul 2010 1:11 pm
Maurice how can you exclude anyone with adverse in last 5 years? Firstly what would you class as adverse? Missed credit card payment, a late mortgage payment? On the back of the recession there will be plenty of previously squeaky clean clients with a bit of adverse credit picked up. What happened to TCF? If a client cannot move mortgage due to a small adverse blip then they are left at the mercy of their current lender. Surely that cannot be right?
As for sub prime, thousands of borrowers will be left stranded until some form of sub prime returns. Any would be welcome, not though to the levels of the past.
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AED | 13 Jul 2010 2:22 pm
This will make life a lot easier as the only people eligible for a mortgage will be those that work for the FSA. Oh, and schoolteachers of course because they can't lose their jobs either.
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