View more on these topics

Costs and dangers of the regulator’s affordability rules

Brokers must work with lenders and the FSA to smooth out potential anomalies in the calculation of affordability

JOHN_CUPIS.jpg

When combined with proposed restrictions on non-bank lenders and the intention to ban self-cert and fast-track, the Financial Services Authority’s wish to prescribe affordability assessments in detail will leave lenders little room for manoeuvre.

If the proposals in the regulator’s Mortgage Market Review survive the discussion and consultation process to become strict rules, lending conditions will be tighter than we’ve been used to for decades.

Clearly, a lot depends on the details of the elements to be included in the affordability calculator. For example, there’s plenty of room for debate about which spending should be included when deciding how much money is available to meet the monthly mortgage payments.

The discussion paper proposes a belt and braces approach which could severely limit borrowing capacity.

On the face of it the FSA does not seem to recognise that individuals can cut back on certain lifestyle expenditures when they take on a commitment such as a mortgage.

We may see consumers being advised to go away for a couple of months and then come back when their bank statements show they have cut their spending to levels that get them through the calculator.

Also, the proposed requirement on lenders to check evidence of expenditure through bank statements, for example, is likely to lead to extra cost and more time spent processing applications – not to mention the data security risks.

There could be duplication and contradictions if consumers are forced to go through two assessments

But at least if borrowers need to jump through more hoops to switch lender or move home they may be more inclined to turn to brokers for help.
A further implication is that interest-only mortgages are likely to decline in popularity if they can no longer be used to stretch borrowing limits.

The move to make lenders bear responsibility for affordability when they make lending decisions does not let advisers off the hook – not by a long stretch.

Despite the detailed assessments lenders will be required to carry out and the recognition that they are ultimately responsible the regulator is not proposing to scrap affordability requirements for brokers. Rather, it will leave them pretty much as they are now.

The rationale for this is that brokers can’t properly establish the suitability of mortgages without first assessing affordability.

They are the preferred face-to-face contact point for many borrowers, so are best placed to obtain information about spending and income, including documentary evidence.

All well and good, but there is potential for duplication and contradiction if consumers are forced to go through two detailed assessments. This hassle could be avoided if brokers were able to use the assessment process of whichever lender they recommend.

But this would mean an assessment taking place post-recommendation, which the FSA is likely to object to despite the fact that it should no longer be possible for an unaffordable mortgage recommendation to get past a lender.

It’s clear we are going to have to work with lenders and the FSA to ensure we don’t make life tougher for already strained customers.

JOHN CUPIS
MANAGING DIRECTOR
PMS

Recommended

2

Ban brokers from paying referral fees to estate agents, urges OFT

The Office of Fair Trading is urging the government to ban mortgage brokers from paying referral fees to estate agents. A study on home buying and selling published by the OFT last week recommends that the government should consider additional rules on fees received by estate agents for referring buyers to providers of ancillary services […]

Towergate may be on the prowl for John Charcol

Towergate is rumoured to be looking to buy mortgage brokerage John Charcol. The insurance giant is believed to have pinpointed the brokerage as a potential acquisition target. It was reported at the start of 2008 that the brokerage was up for sale with a £50m price tag. It was bought by Bradford & Bingley in […]

Checkmate rebrands

Checkmate Mortgages has rebranded to Portillion and appointed Philip Dearing, former chief executive officer at Market Harborough as itssavings director.

Income protection

Reassuringly focused on claims

By Ross Jackson, senior protection marketing manager We’re sure you’ll have heard your customers say ‘But insurance companies don’t pay claims’ when giving a reason for not wanting to take out protection. In fact, our State of the Protection Nation research showed that 27 per cent of consumers asked didn’t think protection providers paid out […]

Newsletter

News and expert analysis straight to your inbox

Sign up
Comments
  • Post a comment
  • Gareth Morgan 23rd February 2010 at 9:35 pm

    John Cupis makes some points which are well worth considering but there are some areas which need expanding or viewing from a different perspective.

    He says “a lot depends on the details of the elements to be included in the affordability calculator. For example, there’s plenty of room for debate about which spending should be included when deciding how much money is available to meet the monthly mortgage payments.”

    That’s true but it’s not the whole picture, it’s also vital to decide what get’s taken into account as income, and when. Different lenders include, or treat, different incomes as relevant.

    Affordability is a product of income and expenditure, both need to be consistently and objectively assessed if affordability is to mean anything.

    “On the face of it the FSA does not seem to recognise that individuals can cut back on certain lifestyle expenditures when they take on a commitment such as a mortgage.” is entirely reasonable but ‘certain lifestyle expenditures’ can all too easily become essential expenditure when it’s the difference between getting a mortgage or not.

    I have a lot of sympathy with John’s point that “There could be duplication and contradictions if consumers are forced to go through two assessments” but that argues for a consistent way of representing a customer’s circumstances that can be used by different lenders and intermediaries.

    Thta will also solve the other points made about ‘the detailed assessments lenders will be required to carry out’ and the role of the broker ‘to obtain information about spending and income, including documentary evidence’. A standard data set could be used for exchanging information and removing the need for ‘two detailed assessments’. It also removes the dangers inherent in tying brokers to the ‘assessment process of whichever lender they recommend’.

    Finally it seems to me that “A further implication is that interest-only mortgages are likely to decline in popularity if they can no longer be used to stretch borrowing limits.” is a strong argument in favour of the FSA approach to affordability