Affordability under scrutiny

Affordability was once again in the spotlight last week after Fitch Ratings highlighted the lack of a market standard and the varied ways in which lenders calculate it.

The credit rating agency under- took research into the increasingly sophisticated methods that lenders are adopting to assess borrowers’ ability to meet their obligations in the sub-prime market.

Fitch says many lenders have turned away from simple income multiples tow-ards more complicated calculations of monthly debt payments as a percentage of net income when it comes to underwriting loans.

The report, entitled Assessing affordability in the UK non-conforming residential mortgage market, also presents a comparative analysis of several sub-prime lenders’ proce- dures when it comes to affordability measurement.

Atanasios Mitropoulos, associate director at Fitch’s residential mortgage-backed securities team, says: “It can make a big difference to calculations if lenders ignore deals’ initial discount periods. A market standard has yet to emerge and lenders use various definitions of affordability. As a result, a 40% debt to income ratio can mean different things to different lenders.

“Risk departments face a difficult challenge in finding lending limits corresponding to the new measures.”

Mark Lofthouse, chief executive officer of the Mortgage Trading Exchange and Mortgage Brain, says that although it would be good if lenders could work to a single standard, he doubts this will happen.

Lofthouse says: “There is no consistent method among lenders for calculating affordability and it seems unlikely that they will agree on one.”

He says problems can arise when a lender thinks that a client can borrow more than the broker does, and vice versa.

Fitch’s research also reveals that many lenders are still in the process of setting up systems to allow them to track borrowers’ debts and incomes more thoroughly than in the past.