MMR: CML warns of unwelcome side affects from FSA proposals

13 July 2010 | By Natalie Thomas

The FSA proposes to require borrowers’ incomes to be verified in all cases - meaning not only that self-cert mortgages will no longer exist, but also that lenders will no longer be able to undertake “fast track” mortgage processing.

Under the “fast track” process, lenders assess the application and, on low risk cases, may then undertake a lower level of documentary scrutiny than on higher risk cases, although the borrower should be unaware of this. fast track loans, according to CML analysis and the FSA’s own, have actually experienced lower levels of default than income-verified loans in the prime market, but are no longer expected to be allowed.

This will inevitably mean higher administrative costs in processing loan applications.

In terms of affordability, the FSA plans to require mortgage affordability to be assessed on a capital repayment basis, even where the mortgage is interest-only. Most lenders already calculate affordability on this basis, so this is unlikely to be a concern in its own right.

However, the CML says the position of borrowers who wish to transfer to interest-only to manage periods of financial difficulty needs careful consideration in terms of regulatory treatment and outcomes for consumers.

The FSA also propose a prescriptive approach to assessing the applicant’s available income to support the mortgage application, after taking account of other expenditure. Again, lenders commonly use affordability models to do exactly this. the trade body says it is important to recognise that the FSA’s proposed conservative approach to assessing available income may indeed make borrowing safer, but may also make it more difficult for households to get a mortgage.

This is particularly relevant given that most cases of mortgage arrears and repossession cannot be attributed to failures in the affordability assessment of the original lending decision. Most cases of financial difficulty occur because of changes in the borrower’s circumstance, as evidence repeatedly shows. For example, joint research by the three main advice agencies in December 2009 suggested that over-commitment was a feature in only 10% of arrears cases. Job loss, by contrast, was cited as a factor in 40% of cases.

Michael Coogan, director general of the CML, says: “There will always be a regulatory trade-off between protecting consumers from over-borrowing, and increasing the barriers to home-ownership. The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending.

“The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future. We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side-effects that may arise from well-intentioned regulation.

“There is also a need to manage the regulatory burden that may emerge if the UK proceeds with changes just at the time that the European Commission is also due to publish proposals on the same aspects of mortgage regulation