The FSA’s cost benefit analysis reveals sub-prime or credit impaired borrowers will be worst hit by Mortgage Market Review proposals with one in 10 such borrowers today being locked out of the market.
But the FSA said this reflects the “very poor underwriting standards” of the past particularly concentrated in this borrower group.
The FSA said: “An impaired credit history is the strongest predictor of arrears and repossessions.
“This is the sector of the market where we saw some of the worst underwriting standards – in some
cases bordering on the predatory.”
Despite this the FSA has decided to drop the proposal to force lenders to hold an additional capital buffer on credit-impaired loans, which many said would restrict the ability to lend to these borrowers.
The FSA said: “We believe that our wider affordability proposals will deal with the biggest issues around impaired credit mortgages, which we believe are largely to do with inadequate assessments of affordability either through the use of self-certification or the generally poor standards applied by many of the lenders who ‘specialised’ in mortgages to credit-impaired consumers.”
In its latest paper the FSA is consulting on how to deal with credit-impaired borrowers using a mortgage to consolidate debt.
Its analysis shows the number of credit-impaired borrowers who consolidate debts are very few at 0.05% of total sales today and at the peak of the market less than 1%.
The FSA is proposing two alternatives.
One is that where a credit-impaired borrower is repaying debts from the proceeds of the mortgage, and those debts impact on affordability if they remain outstanding, the lender should take reasonable steps to ensure that those debts are in fact repaid, for example through direct payment by the lender.
The second is to expect the lender simply to proceed on the basis that the debts will remain outstanding and therefore that they must be taken into account when assessing affordability.
