The FSA fails to understand the mortgage market
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The Financial Services Authority’s Mortgage Market Review was published yesterday and although you are not at risk of getting autism from this MMR there will be a significant amount of consumer detriment if the report’s proposals to ban self certification mortgages are adopted.
Out of the UK’s 10 million residential mortgages about one million, or 10%, were arranged on a self-cert basis and a large proportion of this sizable minority of borrowers are at serious risk of being denied the opportunity to ever get another mortgage, even when conditions in the mortgage market improve.
Thus they will be condemned by the FSA to stay in their current home when they want to move, unless they are prepared to sell up and rent. They will also be denied the opportunity to remortgage and thus be left to the tender mercies of their current lender.
For many who don’t want to move this will not be a problem in the short term as many will revert to a reasonable variable rate when their initial deal finishes. However, when the time comes that they want to switch to a fixed rate they will only be able to do so if their current lenders is prepared to offer them a product transfer rate.
Many self cert borrowers will have their mortgage with a lender which has exited the market and will have no choice but to stay on their revert to rate. If they are not able to switch to a fixed rate when they want to, purely because of the FSA’s ban on self cert mortgages, this obviously increases the risk that their mortgage will become unaffordable if interest rates increase too steeply.
If this results is them going into arrears and, worse still, being repossessed, the FSA will be culpable.
One of the FSA’s statutory duties is to protect consumers, not increase the risk that their mortgage becomes unaffordable!
Part of this full frontal attack on self cert mortgages, which is a perfectly valid product for some borrowers, seems to be based on a major misunderstanding by the FSA of income non-verified mortgages. In the regular returns the FSA requires lenders to submit there is a requirement to specify the proportion of mortgages they sold which were income non-verified.
In asking for the information on this basis, rather than asking for the proportion of self cert mortgages and the proportion of mortgages which were fast tracked, I can only assume that the FSA did not understand the difference between the two. If it did surely it would have asked for two separate figures.
In the spirit of helpfulness I would advise the FSA that self cert is a product where the lender guarantees not to ask for proof of income, whereas fast track is a process where on a mainstream mortgage the lender exercises their right not to ask for the normal paper proofs because they determine that the mortgage is low risk on the basis it has a low LTV, a loan size below a certain level and the applicant’s credit score was good.
Lenders may not (yet) be able to get applicants’ DNA from the credit reference agencies but they can and do get an awful lot of financial and other information.
It is on this basis that ID verification can often be done electronically and sufficient information obtained for the lender to safely cut down on the paper proofs required.
If the credit score is not very useful in making this decision why do lenders, the FSA and the rating agencies all regard it as being so important?
The FSA really can’t have it both ways - either the credit score is a valid tool in assessing mortgage applications or it is not. If it is but the same paper proofs are required for an applicant with a high score as someone with a low score what purpose is it achieving?
On the Today programme Hector Sants, chief executive of the FSA, said: “in the boom times self-cert mortgages were around half of those offered.” This claim is complete nonsense and it is very worrying that the FSA is trying to set policy on the basis of such a serious misunderstanding. It is true that about 50% of mortgages were income non-verified, but only about 10% were self cert.
The arrears record on fast track mortgages is generally better than average, which is exactly what one would expect if the system is working properly, because they are the mortgages the lender has identified as low risk.
This compares with self-cert mortgage having an above average arrears record, which again is exactly what one would expect. This extra risk needs to be priced properly, which wasn’t always done in the run up to the credit crunch, but with correct risk based pricing self cert mortgages are a perfectly valid option for borrowers.
I will leave you with this thought. Over 50% of the population don’t understand percentages but I was shocked to discover that this 50% includes the senior management at the FSA.
No doubt the MMR will have be checked and double checked before being signed off for release but on page 47, section 4.47, it says that “property values increased by almost 300% in the decade before the onset of the financial crisis.”
This didn’t look right to me and so I checked it out with the Nationwide house price index. Sure enough from Q3 in 1997 to Q3 in 2007 this reported an increase of 203%. I suspect the wise heads at the FSA thought that a 3 fold rise in property prices was equivalent to a 300% increase. Oh dear!
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Readers' comments (53)
Marcus | 20 Oct 2009 12:38 pm
I would like to congratulate Ray Boulgar for the above blog.
Ray, you have hit the nail on the head with this blog. The FSA come across as not having a clue about being a homeowner with a mortgage. They do not live in the real world. They create regulation to keep themselves in a job.
I was also reading in The Times that they want to know "how much consumers spend a month on alcohol..." Are you having a laugh Mr Sants et al? You couldn't even organise a p*** up in a brewery (excuse the pun).
Lets keep it simple. Self cert is for the self-employed and should be priced accordingly.
We do not need the banning of products. We need more responsible products. Without the products, the world will stop spinning. Money makes the world go round, remember.
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Andy Wilgoss | 20 Oct 2009 2:02 pm
Excellent blog Ray which hopefully the FSA will take note of. Very worrying that the FSA are trying to make major changes based on data and a market they don't appear to fully understand.
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Dan McGeehan | 20 Oct 2009 3:01 pm
The only certainty from this review if implemented is that consumers will have less choice and pay more.The credit crunch was not caused by self cert mortgages nor is peoples financial woes soley the result of irresponsible mortgage lending. Do the FSA think it is TCF to refuse a self cert mortgage with 5 years plus mortgage history and low LTV but it is fine to advance a FTB 90%. Likewise if we do away with fastrack (which the FSA seem to think is self cert) lenders will have increased admin with the result the cost of mortgage finance will remain high. As Ray Boulger rightly points out lenders spent a lot of time and money developing credit scoring supported by the FSA which enabled high quality/low LTV applicants to source the best rates. History has shown with arrears that this sector has the lowest compared to others. Its fine to ban/restrict certain products but at this fragile time in the mortgage market the last thing we need is FSA to restrict consumer choice and increase cost.
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Roland Millward | 20 Oct 2009 4:43 pm
An excellent article. The FSA is run by people who do not know much about mortgages. The easiest way for them to deal with their own inadequacies is to clamp down so hard on lending that the economy and consumers will ultimately suffer.
The FSA is yet another example of bureaucracy where jobs for the boys from the powers above leads to chaos and confusion.
There is hardly a regulatory body in this country that has a good record in delivering the proper results for its industry.
TIME FOR CHANGE!
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Anonymous | 20 Oct 2009 4:46 pm
This is a question perhaps born out of my lack of knowledge. I could be pursuaded that there is a role for self cert mortgages but is there a good reason why a self employed person shouldn't be obliged to produce a set of audited accounts? Why would anyone whose only income is PAYE apply for a self cert (and I believe many did).
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Michael White CEO Emailmortgages | 20 Oct 2009 4:50 pm
well said that man!
I concur completely with your concerns in regard to the FSA in that they certainly appear to have established a culture of self-aggrandisement, as well as being unable to deal with mathematical percentages! Unfortunately, a damning indictment of the present situation is generally manifested by what I see as a crucial flaw within the ‘expertise’ of the FSA in its application of theory; that being a lack of practical market experience allied to an overly bureaucratic regime. This results in a propensity to broadly ignore all but the largest organisations on any issues and then somewhat paradoxically not becoming involved in matters until after the problems have occurrred.......sounds familiar?
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William Kingsley | 20 Oct 2009 4:53 pm
On this basis the FSA would have failed CeMap and would not be able to conduct mortgage business - hence we as brokers are more qualified than the regulator.
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Dean Robertson | 20 Oct 2009 4:55 pm
Clearly Ray is spot on here once again.
I find it difficult to understand that the FSA is making statements that are both untrue and also misleading. While not an IFA or Mortgage Broker myself, I am sure that FSA would close individual firms down if they operated in this fashion....very disappointed
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Anonymous | 20 Oct 2009 4:55 pm
Another important issue to bear in mind with fast track is that the lenders pass on the requirement to check affordability to the mortgage adviser. The lenders might not have asked for proof of income, but I am sure that the vast majority of advisers arranging fast-track mortgages obtained sufficient proof that the mortgage is affordable.
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Simon Wilkinson | 20 Oct 2009 4:55 pm
If the FSA want to investigate anything withing the mortgage industry, perhaps they might like to look at the mysteries of how applicants are credit scored by lenders. All to easy for lenders to hide behind the magic "failed credit score" without providing an applicant with a plausible reason for the decline
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