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We don’t want to ban interest-only, says FSA

Speaking at the Council of Mortgage Lenders conference today Sheila Nicoll, director of conduct policy at the Financial Services Authority, says it is not its intention to ban interest-only.

She says: “There is a myth around interest-only. Our discussion paper simply suggested that affordability could be better assured if each assessment was made on a capital and interest basis. There was broad support for this.

“But several industry voices said that the problems with interest-only went further and encouraged us to apply additional measures, including going as far as making interest-only lending disappear.

“Thus our July consultation asked in a very open way for further thoughts on what these measures might be, including whether any action was necessary beyond our basic affordability requirement. So, we were a little surprised that, with these open questions, we were accused of  beating interest-only out of the market.”

She says it has always acknowledged that interest-only can be a sensible option for some consumers.

She adds: “What causes concern is where consumers have no visible means of repayment; where no questions are asked about how they intend to repay the mortgage; and where it is clear that stretching affordability is the main reason for choosing interest-only.”

She adds: “A ban on interest-only was never our view.”

Nicoll revealed that there had been over 200 responses to its responsible lending consultation paper and that it would consult further on stress testing for interest rates and income buffers for credit repair clients.

She also used the event to dismiss some of the myths that she says have been associated with the MMR.

These included the theory that the market has corrected itself and no longer needs to be regulated and that there is no need for the MMR.

Nicoll says practices such as self-cert mortgages and riskier lending may reappear in the market once funding returns, which poses a threat.

She says: “With funding much thinner its simple business sense that lenders are doing high quality lending. If self-certified loans are seen as risky low quality loans than there is little wonder there is no funding for them.”

She says it has made a number of visits to lenders who have told it they engaged in riskier practices even though they knew it was wrong but they did it to keep up with competitors.

She says there is the myth that there’s no problem for the MMR to address and that the UK market suffered due to external facts and that lending levels of 2007 were the norm.

She says: “On this myth the CML’s conference theme of magic reminded me of the Blanche DuBois quote: I don’t want realism, I want magic,”

But Nicoll says any suggestion that it will not look at the impact of the regulatory measures irrespective of their impact on the economy and the market is just wrong.

She admitted it hasn’t done cost analysis yet on all of the proposals in the MMR, but it does intend to do so and will release its findings in Q1 of 2011.

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JONATHAN CORNELL, HEAD OF COMMUNICATIONS, FIRST ACTION FINANCE

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  • jools 19th November 2010 at 3:46 pm

    hey Ancient Wisdom….is a mortgage broker in N3, I’m also in N3 – if you’re setting up an estate agency you’ll probably need a broker for your mortgage enquiries!
    Don’t suppose your client bank is going spare?

  • Anon 19th November 2010 at 10:37 am

    I’m pleased to hear this and I’m pleased to hear comments about Self Cert not neccesarily being dead and buried as well, as i think it should be re-branded for the self employed, where there was a place for it when sold responsibly, mving forward we need to grow our private sector dramatically so we are going to need to offer our new entrepenurs something!

    What i’d like to see is real acceptance by lenders on methods of interest only loan repayments, for example tax free lump sums from pensions, commission and bonus earners being able to pay off lump sums, i have very genuine clients who can still use these products and yet one chap this week who has completed nearly 34 years on his final salary scheme 4/80th, expecting a tax free lump sum of £165k been told he can;t have interest only and must now switch to repayment over 7 years! riddiculous!

    i think this is a positive sign we might now move towards a balance on these issues, where regulators can provide clear guidleines and lenders can design appropriate schemes and police them effectively. i don;t really understand why the whole thing has been seemingly so complicated in the first place.

  • Damien Brassneck 19th November 2010 at 10:15 am

    I fail to understand why everyone is implying that the crisis was caused by the UK residential mortgage market? If so you are as misguided as the regulator in it’s thinking that the MMR will fix the problems.

  • Paul 18th November 2010 at 10:51 pm

    Anon, apologies for misunderstanding. I am not saying it is independent brokers who have caused all this; I am saying it is foolish wanting things to be like 2005 again because commissions are being and volumes are being pinched.

    Did anyone see that odious twerp Ray Boulger telling first time buyers to get deposits from their grandparents? It used to be an insult to sell your grandmother.

  • Jeremy Jackson 18th November 2010 at 3:44 pm

    I quite agree with what you have said Paul – however i have done this on an independant basis and for a corporate – From my past experience it is the bank mortgage advisors who need a kick – your e-mail reads as if it is the independants who have caused all this – banks needed bailouts due to their own doings

  • Ron Radway 18th November 2010 at 3:40 pm

    Lenders have always reacted to a problem by overkill, & throwing baby out with the bathwater.
    If the Lenders had listened to FSA & engaged in dialogue, instead of jumping to the demands of their self seeking Compliance Depts, we wouldn’t have this conflict now.
    I fear, however, now that Lenders have put measures in place, they will not repeal.

  • Ancient Wisdom...is a mortgage broker in N3 18th November 2010 at 3:32 pm

    ..people instinctively go for the cheaper option if offered it, thats the way forward for many in life.

    Its a new order now – and repayment only at 75% LTV and above, full status, affordability checks etc etc – it’s there to protect the lender, consumer and public – in that order.

    Brokers should stop whingeing and get on with it, or quit. Broker’s dont have a voice or a say in the FSA rules, and are not in lenders distribution policy after 2011. Brokers are but a dying breed of puppets electing a career path that simply take a small payment for introducing a lifelong client to a lender.

    People dont need brokers now, why – because its all full status, clean credit and deposits of over 15% now to qualify – you can look it up on the internet and go direct now, it takes a little longer but works.

    We are closing the business at end of 2010 – and I want to be an estate agent.

  • Mike Fitzgerald 18th November 2010 at 3:30 pm

    So the FSA really didnt want to ban Interest only mortgages and the now non existant self cert mortgages are only a result of lenders not wanting to take risks
    The quote mentioned by Ms Nicoll regarding Blanche DuBois who was a fictional southern Belle in a Street car names Desire was of course very helpful to the many people who cannot now get mortgages

    The FSA say that brokers and lenders have not fully understood the message that the MMR was trying to deliver.
    Perhaps clearer messages should be given to our industry by the FSA instead of mentioning quotes from American stage plays

  • Ian 18th November 2010 at 3:24 pm

    It common sense at last prevailing at the FSA!!!

  • Ben Olney 18th November 2010 at 3:08 pm

    Are the lenders now going to stop reacting to every single rumour like a stock broker in a strip club? The smart ones are those lenders that haven’t sailed the boat yet on IO.

  • Paul 18th November 2010 at 3:00 pm

    What exactly are you guys railing against? The FSA only want to stop interest only mortgages being used as tools to cheapen housing affordability, as opposed to sophisticated wealthy clients looking to manage longer term cashflows and tax liabilities.

    Minimum mortgage of 500k is a decent cut off to distinguish between these two

    25% deposit does not distinguish that well (but protects the banks against falling house prices)

    The other way to distinguish between the two is to make sure that it can be afforded on a repayment basis (besides, in the 90s you had to put this into an endowment anyway)

    And annual checks by lenders that other arrangements are in place to pay off mortgage at expiry (which do not include sale of property or inheritance) nips potential problems in the bud.

    It seems to me that you guys do not mind the UK wasting billions in bank bailouts leading to higher taxes/reduced services etc as long as you can maintain your revenues.

  • jools 18th November 2010 at 2:09 pm

    Too late, the lenders have already blinked.
    Has Ms Nicoll tried to get an interest only mortgage at over 75% LTV recently ? They don’t exist anymore thanks to their ‘open questions’ to the market in their consultation paper.
    One whiff of the FSA doesn’t like something and the lenders cack their pants and stop doing it to save a nasty visit later on.

  • Damien Brassneck 18th November 2010 at 12:03 pm

    Sounds like she’s backing off…a little!
    An attempt to save face me thinks.