The long-awaited Mortgage Market Review proposals from the Financial Services Authority could bring a much-needed injection of common sense to lending.
Done right, these plans could ensure that fewer peoplebecome trapped in negative equity.
They could also help to limit the damaging impact of swings from feast to famine in the availability of mortgages,with supply becoming more sustainable in the longer term.
Under the proposals, lenders should only arrange a mortgage for reasonable expectation that they will be able to repay that loan without relying on future house price rises or low interest rates.
The dominance of largel enders is an important factor behind the lack of competition we see today
New restrictionsmean that interest-only lendingwill nowonly be available for borrowers with repayment vehicles or realistic downsizing options – for example, those who are already living in high-value properties.
The introduction of interest rate stress tests, based on a five-year forward yield curve, should alsolead to more realistic assessments of the longer-term affordability of mortgages.
With the new requirement that borrowers’incomes will have to be verified, the days of easyfast-track and self-cert mortgages are over.
With nearly half ofmortgage applications processed without incomeverification between 2005 and 2010,it is little wonder that so many consumers got into difficulty with repayments.
We were pleased to see that some of our concerns about protection for existing borrowers have been picked up in the proposals, butwewant to see stronger measures forthese transitionalcustomers to ensure they are treated fairly by lenders.
One situation to which the transitional arrangementsshould also be applied is when the new repayment is higher than the old repayment, for example, ifa borrower moves from the SVR to a fixed rate contract to achieve certainty over future payments.
This is all the more important given that households are now more vulnerable to interest rate increases -in mid-2011, 65% of regulated mortgage balances were on variable rates, compared with 40% in 2007.
We also want the regulator to ensure that couples who are separating are able to remove one partner from the mortgage without losing their right to transitional protection.
Lenders should be required to continue their contractual obligations to existing borrowers without being able to price-gouge captive customers.
There are legitimate fears that the new proposals will reduce access to home ownership for some. But perhaps the biggest long-term barrier to sustainable, affordable home ownership is the lack of effective competition in the market.
The current dominance of large lenders with high margins is an important factor behind today’smore expensive mortgage products.
That is why the government musttake greater steps toimprove competition in personal financial services, including making Lloyds Banking Group sell more of its assets.
In the absence of serious action on this front by those who control the public stake in Lloyds group, demands for this issue to be referred to the Competition Commission will grow.