Today’s consultation paper forms the first follow up to the Mortgage Market Review discussion paper published in October 2009. Consultation on these proposals will close in November 2010.
Reflecting the FSA's enhanced consumer protection strategy and intensive day-to-day supervision, the proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control, according to the FSA..
Some of the key proposals include:
• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
• Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
• Extra protection for vulnerable customers with a credit-impaired history.
The tough new proposals, published in the consultation paper, form part of a major review by the FSA into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.
The FSA found that:
• 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
• Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
• The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
• Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
• Borrowers with a credit-impaired history are particularly vulnerable.
Lesley Titcomb, FSA director responsible for the mortgage market, said: “There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.
“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”
Today's report also includes the key findings from the FSA's review into arrears charges, which indicated significant variation in the level of arrears fees across the market.
The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.
The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.
