Recently, many column inches have been given over to the discussion of fast-track and self-certification mortgages. I’ve read the discussions with interest, and agree that consensus should be reached.
The Association of Mortgage Intermediaries (AMI) is taking guidance on the issues at present, but it is always helpful to have an open debate, as it appears wider opinions are divided.
In my mind, superficially the answers appear to be very straightforward.
Fast-track is a prime product where a lender doesn’t ask for verification of income, but does reserve the right to do so.
Self-certification allows someone to certify an income as a total figure, and will not require evidence.
From an underwriting perspective I can also see the obvious distinctions in practice. A client with a low basic salary and high-commission payments may need more than 50 or 60 per cent of their non-guaranteed commission taking into account in an income calculation.
Should that be bundled up as one total figure and the case fast-tracked? Absolutely not – that would be fraudulent.
Should the client consider self-certification to take into account their total earnings, or look to a lender with discretion to accept a higher proportion of non-guaranteed income? Yes, they would be the perfect candidate in my opinion.
Scratching the surface
So that’s simple enough. But my concerns arise when you scratch below the superficial surface. What if a client was borrowing less than that? What if that client would fit the fast-track affordability criteria? I can hear the calls for self-certification already.
But let’s turn it on its head: if a broker recommended a self-certified mortgage to the client, and subsequently the client learned that they were eligible for Northern Rock’s guaranteed fast-track, would you as a client complain?
Would you feel an injustice that you had paid 50 basis points extra for the last few years? If they did complain, how likely would they be to succeed? There’s no point agreeing a way forward that merely acts as the noose for our own necks in years to come.
Grey area
Looking at some of the biggest names, my question is where fast-track ends and self-certification starts, and what any grey area in the middle really is? Prime mortgage lenders such as Halifax and Northern Rock by their own admission do not offer self-certification products.
However, if a lender offers limited underwriting requirements and a guarantee not to request further documentation, is this really in the spirit of fast-track? I think not.
What I see is the emergence of ‘grey’ in the middle of the market. I’m not sure what name I’d give it but perhaps ‘risk-based lending’ is a suitable title?
My understanding is that Halifax will consider any case that passes with an A grade, even if the person is self-employed for a matter of months. This is the type of case that other high-street self-certification lenders wouldn’t even consider – with minimum durations of self-employment of six or 12 months, for instance. If a mortgage lender is operating on a risk basis then surely they have some responsibility for their back-book?
Europe
The reason I bring up the issue of risk is a very European one. As the Basel II accord, which addresses risk management and regulatory capital, is adopted by prime lenders, I think we will see an ever increasing emphasis placed on risk.
This will require lenders to focus on the risks of their lending and to capitalise appropriately for this. The implications of this are far and wide – from individually priced products based on an individual’s own risk profile, through to products actually being designed for specific clients.
However, what is telling is that over and above the high-level risk-based decisions – maximum loan-to-value exposures at certain loan amounts for instance – the management of risk becomes an issue of capital and therefore cost.
And as increased emphasis is placed on risk analysis, I see the paper-trail behind a lending decision becoming less and less relevant, with a reliance on highly complex credit analysis and modelling.
Clearly this has implications for product sales data with the Financial Services Authority (FSA), if one lender reports ‘risk-based lending’ as self-certification and another doesn’t.
The FSA is working on the self-certification/fast-track issue at present, and I can’t specifically comment on this, aside from observing that the current product sales data coming out of the FSA doesn’t rank highly in my tables of either accurate or reliable data.
This doesn’t answer the question of what should be agreed today, but it does make me think that any conclusion we draw should anticipate changes in the market and incorporate them too, rather than legislating for yesterday and leaving the situation just as confused for tomorrow.
Catch up on the industry buzz
Find the latest industry jobs
Get the daily news delivered to your inbox
