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Time to get your ducks in a row on affordability

When I criticised lenders’ appetite for pushing the bar ever higher on income multiples recently, I took a lot of flak.

I was criticised with some robustness by Abbey, which feels I focussed on the sensational media headline hype that surrounded its 5 x joint income announcement rather than on its procedural checks and balances.

I was also rounded on by a number of my commentator colleagues who think I’m being a bit of a Luddite when it comes to the issue of affordability.

OK, I agree with you all. But does the fact that I’m a shallow and sensationalist prophet of doom make me wrong?

I suspect that following this month’s largely unanticipated Bank of England base rate increase to 5.25%, there will be a significant increase in the number of people who share my view – particularly borrowers.

The rate announcement followed hard on the heels of a Financial Services Authority rep-ort into the robustness of lenders’ record-keeping procedures. This, surprise surprise, found that many lenders are failing to deliver the standards required.

And although the regulator doesn’t go so far as to condemn lenders’ propensity to increase lending multiples it does come down heavily in favour of a prudent approach to affordability.

If I temporarily ignore my own prejudices in this arena and simply concentrate on the facts minus unfair frivolity, I am more than ever convinced that an adjustment is necessary.

What the FSA report says to me is that despite a regulatory regime that has seen compliance and risk dominate our domestic lending landscape for a number of years, the message has still only partially got through.

Lenders find writing new business sexy, exciting and appealing while finding compliance and risk constraint restrictive. And who could sensibly challenge them in this view?

You only have to look at the personalities employed in each sector to know why this is the case.

Compliance and risk departments are staffed by the financial services equivalent of the walking dead – bean-counting anoraks who can’t create but know how to stifle. And on the sales side we have the gunslingers.

Wouldn’t it be fun to switch the staff between functions for a bit? Perhaps we’d get more realism on both sides.

The latest rate shock, together with widespread predictions of another rise later this year, will give people pause for thought. Repossessions – already on the increase – will undoubtedly see a further upward surge before going on to get even worse.

The signs that were once on the horizon are now written clear in the foreground and borrowers, lenders and intermediaries need to react positively to them.

Affordability calculations are too generous. They are too preoccupied with the position today and insufficiently focussed on the prospect of how things might change tomorrow. And for many people, tomorrow has just arrived.

I’m not generally one for new year resolutions but I urge the mortgage industry to make one – get affordability, compliance and risk assessment in better alignment for the sake of your clients.

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