Fast-track does not pose higher risk, says Fitch
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A study by Fitch Ratings of over 700,000 UK prime mortgages has suggested that fast-track mortgages do not pose more of a risk than income-verified loans.
Fitch analysed the factors that trigger arrears for UK mortgages.
It found that many of the reasons for borrowers defaulting on prime mortgages are also relevant for sub-prime borrowers, such as the original LTV, the debt-to-income ration, whether the loan is interest-only and whether the borrower is self-employed.
But the ratings agency noted a difference when it came whether a borrower’s income had been verified or not.
The report says: “An exception is the status of income documentation, as fast-track mortgages in the prime sector do not appear generically more risky than income-verified loans.”
Meanwhile it found that self-cert mortgages in the sub-prime sector invariably turned out to carry a higher risk than those with certified income.
The report adds: “On these grounds, it looks doubtful that fast-track processing in UK prime lending is generically comparable to self-certification in the non-conforming sector.”
The Financial Services Authority has proposed that income verification will be required on all mortgages in future, under recommendations in its Mortgage Market Review.
This would effectively do away with the fast-track process, in addition to the regulator’s proposed ban on self-cert mortgages.
Many industry commentators have been frustrated that the FSA seems to be confusing self-cert and fast-track, arguing that fast-track does not necessarily mean a higher level of risk.
Readers' comments (5)
Michael Alexander | 3 Mar 2010 11:10 am
We are all aware that for the property market to recover apart a return to 95% LTV mortgages for the first time buyer we need to see a return to fast track in the prime mortgage market. The clients and the lenders need this product and the lenders should take a stand with the FSA. We cannot return to the madness of prior to 2007 because in the long term nobody wins, but we have to find an acceptable half way house otherwise we will remain in a flat market for a very long time.
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Frank Jurga | 3 Mar 2010 11:20 am
I hope the FSA looks at this report. I'm afraid that if you stop self-cert altogether, you're stopping 20% of the population moving on with property and the stagnation will have an awful effect on house prices - there will be false growth statistics show big rises on low volumes and only bring about boom and bust cysles when there is the slightest bit of bad news. I have several clients who make over £100,000 per annum entirely from capital gains who can't borrow under the current regime. You can't fast track because that would be lying and a self-cert declaration of total earnings on lowish LTV is very low risk post 2008 eg start with 70% so my clients can at least get 3 fold gearing.
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Anonymous | 3 Mar 2010 11:39 am
I think FT should remain, but all lenders should take Abbey`s approach and the brokers should keep on record proof of affordability.
If its a true FT case then there should be no problem with having proof on file. Hopefully this will stop a minority abusing the products at the expense of decent, honest brokers.
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Michael White CEO Email Mortgages | 3 Mar 2010 12:35 pm
I very much welcome the report from Fitch and along with many others completely agree with Mr Alexander on the availability of Fast Track.
In regard to self-cert, I accept the performance of sub-prime for some lenders may have "carried a higher risk" but not the unmitigated disaster the FSA would have us believe.
If you price for risk and importantly ensure the security is satisfactory valued arrears should become a manageable problem and not a monetary loss resulting in a lending crisis.
In short, a robust self cert credit repair product for the self-employed at a maximum LTV of c60% at current values should work and will certainly be required. For Prime borrowers such LTV could be increased to c70%.
Unfortunately, the FSA are intending to regulate self-certification mortgages out of existence regardless of the fact that, at a conservative estimate, we have approximately one million borrowers with self-cert products who will never have missed a mortgage payment but are now probably wondering what the hell is going to happen to them when their deal ends.
As we come out of this awful recession, entrepreneurs will look at the climate and many will seek the opportunity that comes out of this adversity. It will be this band of people who will wish to start businesses, who will generate income, jobs and taxes to help haul UK plc out of this mess. And yet, the regulator is saying that we will not allow these people, who are likely to be self-cert candidates, both prime and some unfortunately sub-prime, to access mortgage finance on this basis. Utterly ludicrous and completely self-defeating.
The FSA continually give out expressions of agreement in terms of working in conjunction with the market, but I believe that is not genuinely supported by real conviction.
Let the lenders do what is meant to be their business, let them decide, let them create. Just let them work with very strong caveats attached that warn of tough penalties for combining credit risk with security risk.
It really is not rocket science, but at the present, the FSA policing strategy of amputation rather then cure is so very wrong.
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Anonymous | 3 Mar 2010 1:03 pm
I must disagree with Mr Alexander, why do we need fast track to help the market reemerge? Fast track is simply the lender syaing they dont want proof of income and the onus is on the broker...therefore leaving the broker with the risk, "oh hello Mr FSA yes we the lender asked the broker to check and it seems he didn't after all". As a competant and compliant broker surely you would ask the client to prove their income anyway and take copies of this for your own records so as a broker you dont need fast track it just speeds up the process a little bit. I have never had a client say "oh well if you're going to ask for payslips i won't buy the house". The lenders don't need it, it just speeds it up for them and saves on processing costs. The only people who would be afraid of losing fast track are those who abuse it and use it as a self cert product. However once again with self cert the professional broker would obtain proof that the income existed, as just because the lender didn't require the information they wouldn't give advice without knowing the facts, would they?
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