It was widely anticipated that the report would include measures to limit LTVs and income multiples but the regulator says it will hold back until September before it announces its intentions for the mortgage market.
But the report sows the seeds for possible changes in the market.
It states: “The rapid extension of mortgage credit was a key factor in the origins of the financial crisis in the UK and several other countries. In the UK high initial LTVs and loan to income ratios played an important role.”
Lord Turner says there are three potential rationales for mortgage product regulation.
The first would be to protect customers against the consequences of imprudent borrowing and the second would be to guard banks against the consequences of imprudent lending.
The third rationale would be to constrain rapid credit growth and the excessive property price rises which increase the amplitude of economic booms and busts.
The report also acknowledges the negatives of imposing restrictions on lending such as disadvantaging first-time buyers who can’t get help from their families.
Michael Coogan, director-general of the Council of Mortgage Lenders, welcomes the chance to explore the pros and cons of limitations on products.
He said: “We see this paper as an opportunity to help shape a regulatory landscape that will serve lenders and consumers better. We look forward to working constructively and collaboratively with the industry and the FSA.”
And Brian Morris, head of savings policy at the Building Societies Association, said: “It is appropriate that the FSA should focus on liquidity and capital requirements. It should concentrate on areas of greatest systemic risk.
“I agree with Lord Turner that there were insufficient challenges to assumptions about self-correcting markets.”
He added: “I’m pleased the FSA has highlighted some of the drawbacks of regulating mortgage products as restrictions imposed by regulation could further stifle mortgage lending.”
Proposed remuneration code could feature in FSA Handbook
The Financial Services Authority has published a consultation paper on remuneration which outlines a code of practice for large banks and brokers.
The code includes a general requirement that firms should establish, implement and maintain remuneration policies, procedures and practices consistent with effective risk management. It also proposes that the code’s principles should be included in the FSA Handbook to guide firms on the evidence the regulator will focus on when assessing compliance.
The code would apply to some 45 of the largest banks, building societies and brokers operating in the UK.