"The much awaited Mortgage Market Review is finally out and I’m sure many of us are still reading it and looking at the finer detail.
My initial reaction is that MMR contains little in the way of surprises and builds on previous versions and clearly reflects much of the feedback from the industry.
The industry will probably focus on the things it doesn’t like such as the inclusion of fast-track alongside self-cert as being unacceptable going forward where income is not verified.
This would not be wise in my view since as an industry we haven’t exactly covered ourselves in glory in these areas in the past and should expect the Financial Services Authority to instigate higher standards.
I have no problem with this.
The FSA says that at the core of its proposals are three principles of good underwriting:-
• Mortgages and loans should only be advanced where there is a reasonable expectation
that the customer can repay without relying on uncertain future house price rises.
Lenders should assess affordability.
• This affordability assessment should allow for the possibility that interest rates might
rise in future: borrowers should not enter contracts which are only affordable on the
assumption that low initial interest rates will last forever.
• Interest-only mortgages should be assessed on a repayment basis unless there is
a believable strategy for repaying out of capital resources that do not rely on the
assumption that house prices will rise.
It’s hard to argue with any of these principles. Anyone who has been practicing as a lending/credit officer for any length of time will tell you that these principles and others are key to making a good decision about a loan.
It has always been thus. It’s just that we forgot them in the euphoria of gaining market share and the seemingly one-way direction of house prices that could always be relied on to bail us out of difficulty if the loan defaulted.
We can’t and shouldn’t rely on this going forward.
There is much evidence of sensible amendments to this consultation paper where feedback from previous consultation has been listened to.
I’m pleased that the Initial Disclosure Document has been dropped and recognise that although we still have a KFI it is hopefully going to be more focused and relevant.
The distribution section makes interesting reading and I have already seen feedback in the press about more direct business being transacted going forward at the expense of the intermediary. I’m not so sure.
In relation to advised versus non-advised sales, I think it is fair that consumers will have struggled to know when they were being advised and when not.
So going forward, subject to some carve-outs for High Net Worth individuals and mortgage professionals, direct contact with consumers will result in advice needing to be given. The question in my mind is who is best to provide that?
The lender or the intermediary? I think the latter since they will be able to give advice about mortgages available more generally in the market and not just from one lender.
Falls in the amount of lending through intermediary channels to around 50% today from highs of close to 70% four years ago is more to do with the relatively low levels of lending we have seen since August 2007 and the fact that the major banks and building societies have utilised their direct channels to meet their lower lending requirements and this is sensible given their sunk costs in branches and direct distribution.
But I don’t think this is necessarily a change for the long term.
Clarification that the lender is responsible for ensuring that the borrower can afford the loan and for income verification, even if he has sub-contracted this to an intermediary is probably where most if not all lenders are now and so shouldn’t present a problem.
The demise of interest-only as a mainstream product has been well trailed and makes sense.
By forcing those borrowers that still wish to go down this route to demonstrate that the loan can be serviced as if it were a capital repayment loan is prudent.
Regrettably where they do have a genuine demonstrable repayment vehicle this will penalise them – a double whammy in effect since the loan will be calculated on a stressed basis and contributions to a repayment vehicle will also have to be met. I don’t believe this will be a significant factor in the owner-occupied market.
If buy-to-let subsequently comes under similar regulatory oversight then this would have more significant consequences.
As for other areas of the MMR I don’t have the space to cover them all but it’s worth picking out a couple.
There are changes proposed for non-bank lenders in relation to capital and liquidity and bringing them more into line with banks and building societies.
These are not deal breakers for the non-bank sector. Of more concern is the continuing difficulty of raising funding through the RMBS debt markets.
The changes proposed will prevent non-bank lender models being too thinly capitalised and failing in the future and costs can be absorbed although some will inevitably have to be passed onto their borrowers.
The read-across into other niche markets including equity release, sale and rent back, home purchase plans, bridging finance, high net worth lending and small business lending is interesting and at first glance this seems to be just a sensible incorporation of changes into all regulated markets.
My reading of it though is that there some markers being put down by the FSA that some of these niche markets – bridging being one of them – are seen to be at risk of behaving in an over-exuberant way.
Overall then I think the MMR should be welcomed and although there is much detail to consider and finer details to be finessed with the FSA I’m sure this is something the industry can embrace and then get on with the other significant challenges we all have today – dealing with the economy and the Eurozone crisis.
These are much bigger challenges altogether!"
