Fitch Ratings says that a market standard has yet to emerge over the way lenders judge affordability.
The credit ratings agency has undertaken research into the increasingly sophisticated ways lenders are adopting to assess borrowers’ ability to meet future obligations in the UK sub-prime mortgage market.
Fitch says many lenders have turned away from the simple income multiple towards a more involved calculation of monthly debt payments as a percentage of net income in underwriting loans.
The special report titled Assessing Affordability in the UK Non-Conforming
Residential Mortgage Market also presents a comparative analysis of
several sub-prime lenders’ procedures around affordability measurement.
The figures reveal that many lenders are still in the process of setting up appropriate systems that allow them to track borrowers’ debts and incomes more thoroughly than in the past.
Atanasios Mitropoulos, associate director in Fitch’s RMBS team, says: “A market standard has yet to emerge.
“Lenders use various definitions of affordability. As a result, a 40% debt-to-income ratio can mean very different things to different lenders. Risk departments face a difficult challenge in finding lending limits corresponding to the new measures.”
The agency’s report also shows example calculations for various types of
Mitropoulos adds: “It can make a large difference, if lenders ignore the initial discount period and additionally stress the interest rate by one percent as compared to lenders who do not do this.”
Gregg Kohansky, director in Fitch’s UK RMBS team, says: “The Financial Services Authority’s initiative for responsible lending has triggered the use of more complex and precise measurement of borrowers’ affordability.
“On the back of this, underwriting processes and risk management have been improved not only to meet regulatory requirements but also to gain an advantage in the highly competitive mortgage market.”