MMR would have blocked 50% of mortgages five years ago

5 October 2010 | By Natalie Thomas

The CML has conducted research into how the FSA’s proposals in its responsible lending paper would have impacted the market had they been introduced five years ago. The trade body analysed mortgages taken out between Q2 2005 and Q1 2009.

Its findings reveal that if the proposals had been in effect from 2005 around four million - 51% - of the market would not have been granted a mortgage.

Of these four million mortgages, the CML estimates that 3.8 million were good mortgages that would have not suffered evident payment problems.

The FSA’s own analysis suggested that only 17% of all borrowers would have been excluded from the market.

The CML used data from its regulated mortgage survey to compile the research, but says it has probed deeper than the FSA.

The FSA’s research was only based on the proposal that lenders would allow no more than 35% of a person’s post-tax income to be spent on the mortgage.

The CML’s analysis was also based on borrowers only taking out a mortgage on a repayment basis, over a 25-year term and allowed for the 20% income buffer for borrowers with an impaired credit history.

It also applied the 2% interest  rate stress test, to test whether the loan would have been affordable.

However, it did not include the impact of other proposals such as lenders requiring income verification for all mortgages, which suggests the number of borrowers excluded could be higher.

The CML’s findings also reveal that only 5% of first-time buyers would have had any recorded payment problems. In effect this means around 730,000 first-time buyers - 95% - would have been denied their mortgage despite having no payment difficulties.

Around 80% of borrowers with impaired credit would not have been able to get a mortgage under the proposals, but the trade body estimates some 20% of these loans were in payment difficulty in 2009.

The proposals would however have resulted in a lower level of repossession and arrears since 2005.

It estimates 151,000 arrears cases and 38,000 cases of possession might not have occurred.

In its analysis paper the CML says: “Rewriting the mortgage rulebook requires regulators to make a judgement about what level of exclusion of creditworthy borrowers is an acceptable sacrifice for making lenders safer and minimising systemic risk of instability.”

It says the current proposals sacrifice too many borrowers and do not chime with its recent research on levels of consumer aspiration to become home owners in the future.

The CML has shared its findings with the regulator and says it hopes the FSA will take the analysis in the spirit intended - to contribute meaningful analysis to the debate about the future of mortgage regulation and where the balance should lie.

In response to the CML findings, the FSA says its proposals are designed to address the major failures that have occurred in the mortgage market and it is actively consulting with all stakeholders to ensure we get the right solution.

It says: “Our evidence shows that 16% of borrowers are already financially overstretched and they are facing problems now as a result of their lenders’ practices in the past, not the MMR.

“But for now borrowers are also benefiting from historically low interest rates and house price inflation - which cannot go on forever.

“This is why it is imperative that we take steps to protect vulnerable consumers and ensure lenders are making responsible decisions.

“We will continue to work with industry and consumers to establish a strong mortgage market where those who can afford mortgages are able to get them.  

“It is in the interests of all that we get this right: both lenders and borrowers suffer from irresponsible lending.”

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