Increasing mortgage regulation has delivered a more stable market but at the expense of consumers’ access to finance, according to a report from the Intermediary Mortgage Lenders Association.
This is also counterproductive to policymakers’ goals of increasing home ownership, according to the trade body’s white paper, ‘Is the mortgage market working for consumers?’.
The paper says consumers’ main mortgage priority is being able to borrow freely.
This is backed by IMLA’s most recent Intermediary Lending Outlook research, which reveals the biggest borrower frustration is affordability constraints.
IMLA says that the financial crisis marked a sea change in regulators’ approach to borrowing.
The trade body notes that consumers before 2007/8 were largely allowed to borrow unhindered.
But the crisis led to easy credit being targeted through regulatory measures such as caps on loan-to-income ratios, the Mortgage Market Review and the revised Basel 3 Accord.
The MMR and Basel 3 have raised capital requirements for lenders and led to reduced availability of non-prime mortgage products and high-LTV loans compared to a decade ago.
IMLA says this has had a “clear impact” on some consumers’ ability to access mortgage finance in recent years.
IMLA research also found brokers have been having difficulty in sourcing mortgages for some sorts of prospective borrowers.
The research found 51 per cent of brokers had been unable to source a loan for a client seeking an interest-only loan, 49 per cent for borrowers with adverse credit, and 46 per cent for a self-employed clients with irregular incomes.
Poorer mortgage accessibility has also hit the market beyond an individual level.
A report by the Nottingham Building Society in August 2016 found the biggest cause of housing transaction failures was mortgage finance falling through.
This accounted for 34 per cent of all failures.
IMLA says policymakers have paid more attention to home ownership in recent years, launching several schemes designed to increase owner-occupancy levels.
“However, by narrowing access to mortgage finance in pursuit of a more robust regulatory regime, they have effectively dampened non-standard borrowers’ prospects for home ownership and made the market less inclusive,” the report says.
“Meanwhile lenders find themselves caught between the legitimate aspirations of consumers and politicians, and the constraints of an expanding regulatory framework.”
IMLA executive director Peter Williams says: “Following the financial crisis, policymakers and regulators have rightly sought to increase the stability of the mortgage market through several different pieces of regulation.
While these polices have reduced risk, they have also reduced non-standard borrowers’ ability to access the mortgage finance needed to get on the property ladder. In order to promote stability, the regulatory regime has effectively created a narrower mortgage market – which is bound to have frustrated the would-be borrowers affected.”
Williams adds that the market is still working for borrowers with large deposits and stable jobs, but is harming non-standard borrowers.
He says: “While it is hugely important that market stability is supported, it is questionable whether such a tight regulatory approach is compatible with policymakers’ goal of increasing popular home ownership.
“It is therefore hugely important that the FCA’s planned Competition Review assesses the role regulation plays in limiting consumer access to the mortgage market.”
The latest IMLA white paper also says mortgage pricing is the second most important factor for consumers when it comes to getting a mortgage.
While pricing has been improving for consumers due to falling rates and lower lender margins, spreads on new loans are higher than they were before the financial crisis.
Although the cheapest lifetime base rate tracker available today is just 1.5 per cent higher than the base rate, trackers were as low as 0.19 per cent above base in the mid-2000s.
Furthermore, the differences in the price available to the lowest risk customer and groups who require higher-LTV products has grown wider as a result of the Basel 3 Accord’s stipulations.
While the efficiency of the application process is typically less important to consumers than accessibility, price, and transparency, IMLA says regulation has still hit this part of the customer journey.
The MMR’s lengthy income-verification process has slowed the approval process and increased the amount of time consumers must spend on their applications.
Williams says: “Some borrowers are faced with higher prices as a result of higher capital requirements, and the applications process has grown longer and more frustrating.
“As a result of this shift away from a market focused on consumers’ interests, IMLA will continue to argue the case for an independent assessment of mortgage regulation to be taken.
“The regulatory reviews that have been undertaken have been helpful but in essence the FCA is assessing itself. It is important to ascertain whether the interest of excluded borrowers are properly weighed against the benefits of the current regulatory regime.”