FSA to crackdown on interest-only

18 June 2010 | By Natalie Thomas

Lesley Titcomb, director of small firms and contact centre at the Financial Services Authority, says it may be necessary to intervene in interest-only mortgages.

Speaking at the Council of Mortgage Lenders conference yesterday, Titcomb says in its Mortgage Market Review it suggested that the affordability of interest-only mortgages should be assessed on a capital repayment basis.

But she says it has now rethought that approach both in the light of responses and recent market developments.

She says: “This is an example of where irresponsible lending practices in the past are now biting on the market and impacting significantly not only on consumers but the firms themselves – hence why some lenders have recently said they will restrict sales of interest-only and introduce stricter criteria for repayment vehicles.”

Next month the FSA plans to set out more developed thinking on several issues with its next consultation paper on responsible lending, which will cover non-bank lenders, income verification, affordability, interest-only mortgages and toxic risk combinations.

She also says one factor that really characterised the boom years was the growth in lending made without checking the borrower’s income. And this is something it is determined to address.

She adds: “We want to increase significantly the levels of responsible lending and affordable borrowing.”

She also says that lenders argue that they use fast-track only for the least risky borrowers, but it knows that when the market was growing strongly, fast track mortgages became used more and more frequently.

She adds: “When the market was at its peak, some of these products were overtly marketed to intermediaries with guarantees not to check income. Intermediaries quickly realised which lenders would and would not ask for proof of income and so fast-tracking became a substitute for self-certification in many cases.”

It plans to introduce income verification for all sales.

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Readers' comments (33)

Anonymous | 18 Jun 2010 1:25 pm
bit late just like everything else, like a hurricane act when the damage has been done. thought they had better do something before they close their doors in 2012
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Anonymous | 18 Jun 2010 1:28 pm
HAS THIS PERSON EVER BEEN INVOLVED IN THE MORTGAGE MARKET? ITS JUST SOUNDBITE AFTER SOUNDBITE FROM ANOTHER MEMBER OF THE NANNY STATE. INTEREST ONLY IS BETTER THAN RENTING IN THE LONGER TERM - AT LEAST THERE IS SOMETHING THERE AT THE END OF IT AND ITS ALOT CHEAPER THAN RENTING.WHATV ABOUT THAT LESLEY?
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Anonymous | 18 Jun 2010 1:30 pm
The P45 will be at the front desk coming soon....
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Anonymous | 18 Jun 2010 1:32 pm
Sledgehammer to crack a nut anyone?

Basically, because of a problem which was limited to one area of the mortgage market (e.g Self Cert) why are they hell bent on applying the solution to that on ALL lending?

Many lenders had adequate checks in place when interest only mortgage were being taken out.

The toxic debt (int only & self cert) were mainly lenders who were underwritten by, guess who, American lenders.

Rooftop, Advantage?? Need I say more?

FSA, stop tarring EVERYONE with the same brush...you really make my teeth itch.

Incompetent, delusional and not fit for purpose.
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Jamie | 18 Jun 2010 1:32 pm
How can you assess an interest only mortgage the same way you would a repayment mortgage. For example a client requiring a 10 year interest only mortgage for £150k with a bond or investment propertes as the vehicle would never fit affordability if based on repayment!
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John Bruckshaw | 18 Jun 2010 1:32 pm
I agree....far too little too late and this seems purely to try and attempt to justify a failing dept.Lenders have always and DO request proof of income from brokers and will remove the facility from them if they dont comply so why do the FSA feel it necessary to consider removing a scheme which if used properly speeds up the mortgage offer and actually improves the service to customers the FSA say they were introduced to protect!!
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Anonymous | 18 Jun 2010 1:33 pm
Interest Only mortgages still have a valid use to play in the mortgage market and ultimately if a client has been made aware of all the risks associated regarding repaying the mortgage balance, why should they not be able to make an informed decision for themselves? With affordability being tightened, taking away the option of an interest only mortgage will just make it even harder for certain people to get on the housing market. Well done FSA - another great way to ensure the mortgage market fails to recover in line with the rest of the economy.
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Anonymous | 18 Jun 2010 1:35 pm
to anonymous 1.28
How do you know its better than renting? property value may fall and the borrower would be left with negative equity, not better than renting! Hopefully you are not a mortgage adviser.
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Anonymous | 18 Jun 2010 1:42 pm
There are many clients with very genuine reasons for wanting to take out an interest only mortgage. These clients should not be predjudiced against taking up this route if it really suited their circumstances at the time and also in the future. The FSA are going down the easy route and taking a blanket approach rather than suggesting alternatives to ensure this type of mortgage is not abused. I would also make the same comment with regards 'fast track' - yes this has no doubt been abused by clients and brokers but all brokers should now be obtaining full evidence of income before advising on a suitable mortgage and therefore if the case happens to 'fast track' then so be it. Most lenders are now randomly auditing a percentage of cases and requesting full verification of income from the client or broker. Therefore this should be a clear message to professionals advising on mortgages to adopt the procedure of having evidence of income on file. They would then have nothing to fear. If an audit check by the lender produces a case of fraud then this should be reported to the FSA. This approach would be far more suitable than again taking the blanket approach of banning 'fast track' all together. The 'fast track' approach works well with the right clients who are able to plan ahead and complete their transaction quickly.
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Anonymous | 18 Jun 2010 1:43 pm
I pay a monthly network charge and 10% of any earned income to my network. For this they review my compliance, including proof of income on an ad-hoc basis on my files. If I carry out a mortgage review and subsequently submit an application on behalf of a client, it is my responsibility to ensure I have sufficient proof of income on file and have thoroughly checked the affordability for my client - not just inline with my network guidelines but also in line with any particular lender regulations. The lender then makes the decision when reviewing that particular application whether it requires sight of those documents but given the sophisticated credit check systems and the Big Brother style information held on all of us, this is often unnecessary as lenders can tell from a client's credit file how well they are servicing existing debt etc. Why then does the FSA feel this is still not acceptable? If I submit an application and am lucky enough that it is treated as fast track the lender still has a right to request income verification documents at any stage and it is my responsibility to supply them or risk having my right to fast track withdrawn. Why then does the FSA feel the need to withdraw this facility - the one facility that in the current market is helping to get the market moving, reducing the need for excessive documents, processing times and above all, sensitive data being sent over emails or fax machines to nameless faceless departments.
I fear this situation will only get worse in the run up to 2012 as various individuals at the FSA try to push their names in to the spotlight in a hopeful effort of being able to transfer their job to the BofE dept set up to 'heavily monitor and punish' the mortgage market. Get rid of them all and start again with people who have actually worked in this industry and know what they're talking about.
Taxi for Lesley??
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