FSA’s MMR proposals are inadequate, says think tank
Share
The Financial Services Authority’s Mortgage Market Review does not go far enough in regulating the mortgage market, says a study out today by the Institute for Public Policy Research.
The report, Forever Blowing Bubbles, says from a macroeconomic perspective, the proposals are inadequate.
This it says is because the FSA has placed its emphasis on consumer protection and patterns of current arrears in its rationale for intervention, rather than looking at questions of macroeconomic stability and the build-up of leverage within the economy.
It calls for mortgages to be capped at 90% of property values and at a maximum of three-and-a-half times household income.
The report also argues that deposit requirements on buy-to-let mortgages should be raised and that lenders should ensure that rents cover repayments.
The report says: “The FSA has rejected caps on loan-to-income lending, citing low levels of default rates, despite analysis showing LTI lending played a major role in driving up the level of leverage within the mortgage market.”
It says the FSA has also placed strong emphasis on a continued approach to affordability lending, with discretion being put primarily in the hands of mortgage lenders.
The report says, this raises questions as to whether this approach does enough to constrain the overall level of debt taken out by individuals and of mortgage leverage within the economy.
It says: “In placing lending decisions within relatively loose and subjective affordability criteria it also suggests the danger of an inherently pro-cyclical approach from lenders – loosening criteria in booms and tightening them again in busts.”
It cites non-banks and a reliance on securitisation as some of the main causes of the financial crisis.
In the UK it says this boom may have been exacerbated by the dominance of brokers in the market.
The report says: “Intermediaries had a role in selecting from the booming array of mortgage products, but may also have played an important role in regulatory arbitrage – finding the loosest lending for their clients.”
It goes on to say: “The growth of non-bank credit in the UK mortgage market – through intermediaries and securitisation – poses significant challenges to traditional monetary policy and regulatory oversight.
“It weakens the link between the central banks’ reserve controls and the wider credit system and could blunt monetary authority attempts to control excessive credit growth.”
In terms of its prescriptions for the mortgage market, it suggests limiting leverage in the mortgage market, controlling future securitisation as a source of finance in the housing market, tighter control of lending by non-banks, greater deposit requirements on buy-to-let mortgages, and caps on loan-to-value and loan-to-income ratios.
It adds: “We call upon the FSA to do more on these fronts in its MMR and on government to make greater house price stability a central plank of its economic policy. It is high time we re-examined the case for mortgage reform in the light of international lessons and our own rollercoaster ride on housing.
“After all, there is nothing aspirational or equitable about courting another recession.”
If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat
Readers' comments (8)
Mike Cullen | 31 May 2011 10:44 am
I can't believe people get paid for this, lets reduce multiples to one and LTV's to 75%, then everyone is safe, property will stagnate for 20 years and the ultimately the banks security will fall in value for a decade until we re-align, by which time the current recession will seem like a walk to in the park.
Unsuitable or offensive? Report this comment
nick | 31 May 2011 10:48 am
If the banks knew they would go bust if their lending was reckless there would be no need for any regulation at all!
Unsuitable or offensive? Report this comment
Steve Murgatroyd | 31 May 2011 10:54 am
Where does it all end? How many more institutes/regulators/authorities can possibly get on this band wagon, FSA, CPMA, CML, AMI, IPPR, Brussels? To mention a few! Leave it to AMI, they are the only ones in my opinion who make any sense.
Unsuitable or offensive? Report this comment
Mike | 31 May 2011 11:29 am
Brokers do not find looser lending but fit their clients aspirations to that which is available in the market place. If lending institutions offer a particular mortgage deal that is favourable to our clients we will offer it to them. We look at the array of mortgages consider their terms including affordability, fees, penalties etc and advise accordingly. There were lenders pre crash who offered massive x salary (mostly to direct applicants)and this is what should have been addressed by the Institute for Public Policy Research. If they had consulted with the brokers who they have targetted, they would have seen who was to blame. If they were to look at high loan to values and high salary multipliers they would see that it was the lenders direct lending that offered these terms not usually the brokers. On several occasions I was unable to compete with direct lenders on loan amounts and LTV's. As usual, we don't have a voice and are used as the whipping post.
Unsuitable or offensive? Report this comment
Anonymous | 31 May 2011 11:36 am
Why not abolish BTL done by individuals altogether? rental property is best done by corporate bodies rather than Joe Soap et al, Furthermore it ought to be restricted, over a period, to new build , purpose built property so it no longer competes with FTBs.
as for income multiples, these are known to be a poor way of judging affordability, and do not take into account the circumstances of young professonals whose incomes will rise faster than the norm as they become estabished in their careers.
however, anyone worrying about the IPPR's contribution can relax, the Governemnt is not going to take ony notice of them- they were Tony Blair's favorite think tank, nor is the one tied to IDS comes ot with something similar- Watch Out!!
Unsuitable or offensive? Report this comment
Maurice Edgington | 31 May 2011 12:18 pm
I cannot remember seeing "think tank" comment explaining what happend to the economy, back in 2008, 2009 or 2010 only now, just before MMR comes to a conclusion. People who offer hindsight assistance rarely get the future right. Yes a lot of money was lent to people to buy houses based on rising property values but this was not the sole reason for the financial collapse. I remember clearly a large, badly run, Scottish Bank buying an Insurance Company at a massively over valued price, then almost going bust as a result but getting bailed out by a Scotsman using public funds. Did the CEO get his Knighthood before or after? So in my view let's not blame everything on mortgages, brokers or the property market. Mortgage lenders can lend in a sensible fashion but everyone must accept that this is a business and they can expect factors such as arrears, rising or falling market to have some commercial effect. If mortgage lenders are not allowed to make their own commecial judgments what comes next? Shops not allowed to sell to people who do not sppear to need what they are selling because the regulations say so?
Unsuitable or offensive? Report this comment
mic2002 | 31 May 2011 3:28 pm
Amm..sorry to have to tell this eminent bunch,but mortgage lending in the UK did not cause the financial crisis.Try reading Lord Turners report first.
Unsuitable or offensive? Report this comment
Grey Haired Underwriter | 3 Jun 2011 3:13 pm
To anon 11.36. Your comments remind me of an applicant who wanted a loan that would cost more than his monthly income and then got upset because I wouldn't take his future prospects into account. With your kind of understanding of lending I just thank the Lord that you aren't an underwriter
Unsuitable or offensive? Report this comment