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Capital Economics slams MMR critics

Capital Economics has hit out at critics of the Financial Services Authority’s Mortgage Market Review by claiming they are overstating the case.

It says that claims that the FSA’s responsible lending proposals will do lasting damage to the size and structure of the mortgage market assume that the historically high gap between house prices and incomes is here to stay.

But it says these claims seem overstated and referred to housing minister Grant Shapps’ comments that the MMR was “a step too far”.

In Its UK Housing MArket Focus for December it also highlights the Council of Mortgage Lenders’ figures that 50% of loans would have been blocked since April 2005 under the MMR.

He says: “Assessing the impact of the proposed new rules on loans made during the boom is not a fair test. After all, over that period, looser lending criteria were a key factor driving house prices to record highs in relation to incomes.

“Such calculations also assume that the correction has finished. But what if house price falls and/or rising incomes mean that, in due course, a mortgage of three times income is once again adequate for most borrowers?

“Under such a scenario, the FSA’s affordability rules would only bite once base rates reached 7% or more, a level seen only once since the end of the 1990s recession.”

Capital Economics also says the FSA is right to limit interest-only loans.

It says it is not sustainable for large numbers of borrowers to be able to pay the interest, but not the capital repayments on their loan. Borrowers cannot always rely on house price gains to pay off their debt.

The report adds: “Our view that the house price correction is not over means that we believe that the FSA’s responsible lending proposals will not do anything like the damage to the size and structure of the mortgage market that has been claimed by some commentators.

“In fact, over the medium term, lending volumes could well benefit from the proposals if they help to dampen the house price cycle and keep home ownership within the reach of more people.”

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  • Charles Bunbury 23rd December 2010 at 9:10 pm

    Graeme clearly we are not on the same planet in my book the accepted term for a mortgage is 25 years. 66 – 25 in my book gives a entry age of 41. Please do not come back with a marginal term of 2 years.

  • MikeMeldrum 23rd December 2010 at 3:19 pm

    Capital Economics love coming out with these controversial statements to feed their own brand awareness. Ignore them!
    Like self certification, interest only deals have a place but should only be advised in carefully considered situations. Simlarly both products should not be dominating any lender’s mortgage book.

  • compliance man 23rd December 2010 at 12:33 pm

    Would like to make a couple of points – no axe to grind, just common sense.

    1) Your home is not an investment – that is the problem with a lot of thinking. Once you remove this from the thought process your decision making is different.

    2) Where it is cheaper to have a mortgage on an interest only basis than to rent why would you feel anyone is disadvantaged by doing so providing they understand there is a risk that if they default and the property is worth less than they owe then they could be pursued for the debt. This issue is one of the biggest overlooked in the whole MMR debate. Ok they may have some additional costs as an owner rather then renter but I know which way I would choose.

    3) There is a great deal of difficulty in assesing expenditure. Assessing income is much easier. Ask for bank statements for 3 months and you may find even with 3 different sets you won’t have all of the picture. The FSA want firms to show that any assumed formula basis for expenditure or affordability can be statistically evidenced – very hard for smaller lenders to do that and they can’t just use one of the main lenders basis.

    The idea behind it is sound, the practicality less so.

  • Leslie Squires 23rd December 2010 at 10:49 am

    Mortgage professionals should be looking at ways at helping the public purchase properties rather than having a tirade against those who may have a different viewpoint.

    In my opinion it is important to treat a property purchase as a long term investment and to provide a financial facility that reflects that position. Product providers aiming to attract new business by offering short term incentives have unwittingly been partly responsible for the mortgage market gearing itself on short term goals. It is this short term attitude that needs to be changed.

    On the continent there is a fixed rate mortgage for the term of the mortgage. In order to offer this facility, the lender has to be more prudent with its lending and funding activities. I also suspect the lender has to be careful with early settlement charges if it is to attract new custom. The benefit of this facility is that customer retention takes on a more meaningful consideration to both the lender and the consumer. The lender in being able to take a longer term view is better placed to offer loan and deposit interest rates that are more attractive to the customer. The customer is better able to budget monthly outgoings by the cost of the mortgage not being subject to variation. In my opinion if you stop the short term trading activities in mortgage lending a more stable market place is created and greater confidence is experienced by the consumer.

    Property prices are of course affected by supply and demand. The oddity is that the demand is greater than the supply and yet house prices are reported to be falling instead of rising? There is a healthy rental market where in general more is paid in rent than the cost of a mortgage for a similar property? Clearly sensible lending policies are required to address these issues but so is the need to help potential buyers afford their first home without having to find substantial deposits.

  • DS 23rd December 2010 at 9:31 am

    Graeme,

    What if you were unfortunate enough to encounter an economic downturn after your 25 year term expired and imagine if your property’s value dropped by say 1/3 to £273000 based on the valuation of £410,,000. You would be left with £23,000 (whether that is a profit after continual remortgage costs is debatable) and at 66 you would have nowhere to live nor house your children. Perhaps some Aussie friends will put you up?
    This is a realisitic risk with Interest Only and it is only too right that lending on this basis is done very carefully. I/O is the next mis-selling scandal!

  • Charles Bunbury 23rd December 2010 at 7:40 am

    This way of thinking is fine when you are earning £50,000 – £100,000 pa, what about the millions earning below? Should they pay rent forever and live in the economically deprived areas that the higher earners normally turn their back on? The FSA is doing every thing possible to keep a section of the population down mainly the working class and ethnic minority those on low income; nothing is being said about this aspect of the FSA actions.
    Accepting the point “Such calculations also assume that the correction has finished. But what if house price falls and/or rising incomes mean that, in due course, a mortgage of three times income is once again adequate for most borrowers?
    “Under such a scenario, the FSA’s affordability rules would only bite once base rates reached 7% or more, a level seen only once since the end of the 1990s recession.”
    If the above is true in conditions of rising income then it should also be true for a interest only borrower to repay capital, sell, remortgage, take out equity, hold in fall market, or retain as an investment, in my book people should have the freedom to make decisions clearly this is not the case Capital Economics and the FSA.

  • FC 22nd December 2010 at 7:15 pm

    Graeme, your cavalier approach is breathtaking. What if your customer lives to 96 not 66? You eloquently make the case for MMR.

  • Keith Butler 22nd December 2010 at 4:30 pm

    The number, and importance, of those supporting the MMR is growing. The figures provided by the CML are not just wrong but ridiculously so.
    The “quiet majority” are at last making their voices heard. The industry has been damaged for to long by the “get rich quick” merchants who have no interest in the industry’s long term sustainability.
    Expecting customers to be able to afford the repyments and having income confirmed are not outrageous proposals – they’re just common sense that the honest intermediaries should welcome.

  • Graeme 22nd December 2010 at 4:28 pm

    If I buy a property at £250,000 and it conseratively grows at 2% per annum then in 25 years my house should be worth £410,000. As I only paid the interest I had money for my family to have a full life with great holidays etc and at age 65 I had to take my equity lets say £50k and my equity £160,000 and buy a smaller house, so what I may be dead at 66.

    On the same sceanario how many people with hindsight would look back at age 66 and wish they had been to Australia, the great wall of china etc but couldnt as they had to much expense, and now they are unable to travel due to health etc etc

    Come on there are too many people telling you how to live your life… so many lenders already use a repayment cost for affordability even if you are doing interest only….. so what policy needs to be in place to control the wicked interest only mortgage.

  • Graeme 22nd December 2010 at 4:27 pm

    If I buy a property at £250,000 and it conseratively grows at 2% per annum then in 25 years my house should be worth £410,000. As I only paid the interest I had money for my family to have a full life with great holidays etc and at age 65 I had to take my equity lets say £50k and my equity £160,000 and buy a smaller house, so what I may be dead at 66.

    On the same sceanario how many people with hindsight would look back at age 66 and wish they had been to Australia, the great wall of china etc but couldnt as they had to much expense, and now they are unable to travel due to health etc etc

    Come on there are too many people telling you how to live your life… so many lenders already use a repayment cost for affordability even if you are doing interest only….. so what policy needs to be in place to control the wicked interest only mortgage.