The agency's comments follow the publication on 15 November by the Financial Services Authority (FSA) of the results of its research and a mystery shopping exercise with respect to self-certification (self-cert) mortgages.
They found that nearly half of brokers in the study had failed to adequately demonstrate that the product was affordable for the applicant.
"It is encouraging that the FSA found more limited evidence of brokers encouraging applicants to exaggerate income to obtain a self-cert product than BBC studies two years ago. However the fact that affordability checks remain flawed affects the quality of self-cert business being originated," said Stuart Jennings, managing director in Fitch's residential mortgage-backed securities (RMBS) group. "Fitch therefore continues to apply higher default assumptions to self-cert mortgages when rating RMBS transactions containing this type of loan product."
Both in this study and in a September study focusing on sub-prime, the FSA also found that in the majority of cases,
brokers had failed to gather sufficient evidence to support their product recommendation.
"Brokers clearly need to sharpen up their act to emphatically rule out any danger of a mis-selling scenario arising in the non-conforming mortgage sector. Lack of supporting evidence for product recommendations makes it difficult for a mortgage broker to defend against an allegation by a borrower that he has been mis-sold a sub-prime mortgage," said Jennings.
"This is exacerbated by the inherent conflict for brokers in the way they are remunerated. Procuration fees paid by lenders to brokers to originate self-cert and sub-prime mortgages can be up to four times those for a full status prime loan. There is therefore the temptation to maximise income through recommending such products when the applicant may, in fact, qualify for a cheaper low margin full status or prime product," Jennings concluded.
Lenders in contrast appear to have shown progress in improving procedures. Fitch has noted initiatives from some lenders, which include, for example, the use of 'cascading' systems which checks whether an applicant would qualify for a cheaper loan product than the one being applied for, given the information about the applicant presented by the broker. However this only provides information and the broker remains responsible for the product recommendation.
Elsewhere some lenders have published practical guidance for brokers on matters such as the FSA's "Treating Customers Fairly" initiative. Nine out of ten lenders questioned by the FSA reported adding additional controls with respect to self-cert or improving existing ones following the FSA's publication of a "Good Practice Guide" in February 2004.
The agency also announced plans to publish an update report to its previous self-cert research "Pound Stretchers? Self-Certification Mortgage Products in the UK"
