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MMR will not help a third of sub-prime borrowers

Under Mortgage Market Review rules at least a third of sub-prime borrowers would still be mortgage prisoners, despite a clause designed to help those trapped in their properties or loans.

The final consultation paper of the MMR says lenders will be allowed to waive affordability rules to rescue those unable to remortgage or move house because of tighter lending criteria, but to qualify borrowers must have had no arrears in the last 12 months.

And despite the MMR listing self-cert and interest-only borrowers as examples of those who could benefit from the concession, Moody’s claimed in its Credit Insight report last week that a large number of such borrowers would have too poor a credit history to qualify for it.

The ratings agency says that about 30% of borrowers in non-conforming residential mortgage-backed securities are in arrears, equating to around 150,000 borrowers, based on Standard & Poor’s estimate that there are about 500,000 outstanding loans in the non-conforming market.

Moody’s adds that the proportion that have been in arrears at some point in the last 12 months could be significantly higher.

It therefore argues that the MMR will have a negative impact on the performance of non-conforming RMBS in the medium to long term, as the rules will prevent borrowers from refinancing once their deal comes to an end or interest rates rise.

RMBS transactions with a high proportion of self-cert and interest-only borrowers will be worst affected by the rules.

Moody’s highlights GMAC-RFC’s RMAC transaction as one that would fare particularly badly, as 64.6% of its loans are self-cert and 69% are
interest-only, and Southern Pacific Mortgages’ Southern Pacific Securities,with 64.3% self-cert and 48.7% interest-only, is also singled out.

A spokesman for the Financial Services Authority says: “Our proposals are designed to ensure borrowers only get a mortgage they can afford.

“But as a result of irresponsible lending practices in the past, no matter what steps we take there will inevitably be some borrowers who find it difficult to get a mortgage in the future.”

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  • Richard Scott 23rd January 2012 at 2:25 pm

    It will be interesting to see if the following scenario I have come across is allowed more leeway: I have a client with an interest only mortgage with a large buildings society. Last year he enquired whether he would be able to use their porting facility with a view to downsizing his property and consequently his mortgage balance by approx 32%.
    However, as the lender treats porting as “new borrowing” he failed their current affordability criteria due to changes in his employment status, despite having an A1 credit score and blemish free payment history.
    I asked them to explain how they were happy to retain his loan at the current higher rate of repayments (knowing the answer would be it was affordable when he took it out)but would not consider much reduced repayments and lending which was on paper even more affordable. The answer was exactly as predicted.
    It strikes me that this client is being prevented from helping himself and the lender would rather see him default and be repossessed than make some sensible decisions.
    Ironically this client is due to revert to the lenders SVR of 2.5% in less than a years time so his repayments will drop by 55%. So this will help, but had he been allowed to do what he wanted last year, the reduction would have been even more helpful!!

  • Victor Meldrew 23rd January 2012 at 12:20 pm

    Its good to see the FSA take such a sympathetic view of those that are in the trap because of irresponsible lending that they allowed to happen. They were after all the regulator that was supervising the lenders and allowing them to lend irresponsibly. It was they that were the regulator that was charged with protecting the consumer and educate them so they didn’t become irresponsible borrowers. But why should we expect anything different from such a bunch of arrogant, irreponsible, unaccountable civil servants protected from the realities of life.

  • Justin - JF Financial Associates 23rd January 2012 at 10:16 am

    If the FSA with MMR, is trying to help address affordability issues for sub-prime lenders. Will these new special rules just mentioned allow lenders to reconsider the way they look at clients on debt repayment plans (DMP’s)? I have a lot of clients who have taken debt advice from Debt management companies or charities, and have managed to stabilise themselves by going onto debt management plans. They now have defaults and the odd CCJ, however as they are now repaying their debts (all be it via a DMP) most of the adverse has been minor or they have prevented anything more serious. This said, the fact they are on a DMP, means that most lenders won’t look at them, even though most of them would fit the “adverse” criteria of the lender? The lenders either a) say that they view a DMP the same way as an IVA!? which it’s not! or b) they use the full contractual payments to all their debts when working out affordability, and not the agreed DMP payments which are/could be substantially less than the full contractual payments, and hence fit the lenders affordability checks. To me this is a very short sighted view by the banks on helping these clients with DMP’s. Firstly they have sought debt advice (taken responsibility for their debts) and are actively being managed (by the DMP companies) to repay their debts, and secondly most of these lenders have also lent to these clients on an unsecured basis. Surely by offering these DMP clients a re-mortgage, say into a 3-5 year fixed rate, would actually help create a stable environment for these clients to continue to pay back “ALL” their debts?! A fixed rate mortgage = stable mortgage payments for the clients. A DMP = stable repayments to all their unsecured debts, and this can only equal a “win-win” situation for the lenders and clients. Restrict LTV’s accordingly, don’t lend to very high risk individuals, but help the vast majority. Once rates start to increase again and if these clients aren’t in a stable mortgage environment by then, it will be a lose-lose situation for the banks and clients! Prevention using common sense in this case, is by far the better option than the real consequences of ignoring this problem!

  • Charles Haresnape, Aldermore 23rd January 2012 at 8:10 am

    Many previous sub prime borrowers with equity but poorer recent credit history will need to rent in future if they wish to relocate for work or extract equity. This will continue to support BTL and continue a shift in long term housing structures for our society.