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.