With his usual slight tongue in cheek, Ray has rewritten the regulators press release yesterday outlining Consultation Paper 10/16 MMR and Respsonible Lending.
Boulger says: “It’s an amended version of what I think the FSA meant to say but was too shy to do so.”
Extracted from Ray’s excellent blog on Charcol.co.uk, here’s what he has to say…
FSA moves to make sure all borrowers with a new mortgage can afford it
The Financial Services Authority (FSA) has today outlined proposals to ensure all mortgages are carefully assessed to make sure borrowers can afford them.
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. (This is admittedly shutting the door after a very small horse has bolted and if we had any examples of current lenders which haven’t already got back to so called basics we would give them to you, but we haven't and so we can't)
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; (Who is ultimately responsible for this now if not lenders?)
- Requiring verification of borrowers’ income in every case to prevent over inflation of income and to prevent mortgage fraud; this is admittedly an over-reaction because we weren't doing our job adequately before but we now have to show our teeth before our responsibilities are passed to the Bank of England and a new consumer protection body. We prefer to gloss over the fact that self-cert and fast track are very different animals because we don't like unhelpful facts to get in the way of what we want to do. Therefore we prefer to ignore the fact that most of the approximately 50% of mortgages previously provided without proof of income were processed on a fast track basis, not as self-cert. The fact that arrears on fast track mortgages are lower than arrears on non fast tracked mortgages may prove that lenders are already acting responsibly in their choice of which mortgages to fast track but that won’t deter us in our quest to increase lenders costs, particularly as we expect the percentage increase in costs as a result of these proposals will be less than the percentage increase in FSA fees this year. With the lack of competition in the market lenders should have no problem passing these extra costs on to borrowers and we think borrowers who got used to the nanny state under the previous government will be happy to pay extra to be protected from themselves.
- Extra protection for vulnerable customers with a credit-impaired history.
However, we recognise that most problems were due to a change of personal circumstances, such as a relationship breakdown or redundancy, not due to bad original lending decisions and appreciate that lenders can’t be expected to factor in the risk of divorce in their underwriting process.
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; however, when interest rates increase most will simply cut back on the non essential spending they increased when their mortgage payments went down. Therefore this statistic doesn't automatically mean their mortgage is unaffordable. It does, perhaps, mean that our statutory commitment for consumer financial education has not been very successful in encouraging people to save, although this is because of the tiny budget the Government gave us for this purpose. N.B. The 46% figure may be a little dodgy because it is based on average expenditure figures for each decile and few people are actually average. Therefore, despite our large sample of 9,000 people we can’t be confident how robust these figures are, but they help our argument, which is the important point. We forgot to carry out a sense check on this figure before publishing the CP but had we done so we might have asked ourselves why mortgage arrears are so low if 46% of households either had no money left or spent more than their income each month.
- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income; see above - bullet point 2
- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only; at the peak of the market 12% of mortgages were buy-to-let (BTL) and even we recognise that interest only is appropriate for most BTL mortgages.
- 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; this contradicts our finding when we last did a thematic review of interest only. See below for press release of a report on our thematic review of interest only mortgages published only 3 1/2 years ago, from which you can see that when we didn’t have our current agenda we thought only 15% of borrowers with interest only mortgages did not have robust repayment plans.
- Borrowers with a credit-impaired history are particularly vulnerable.
“While it is clear the mortgage market has worked well for many, in fact the vast majority, 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.”
The 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.
*Extract from FSA press release dated 13/12/06 http://www.fsa.gov.uk/pages/Library/Communication/PR/2006/134.shtml
Consumers taking out interest-only mortgages generally have a reasonable understanding of the risks involved but a significant minority do not have a robust repayment strategy in place, the Financial Services Authority (FSA) said in a report today.
Research in the report tested how borrowers, who had recently taken out an interest-only mortgage, planned to repay the loan and the extent to which those consumers understood the risks associated with this type of borrowing. 24% of new mortgages are taken out on an interest-only basis.
The research found:
• Consumer understanding of the interest-only mortgage product was high and understanding of the risks associated with it generally good.
• However, 10% of consumers taking out interest-only mortgages have either no idea or at best only a rough idea of how they plan to repay the loan they have taken out.
• A further 5% say they have a definite repayment strategy but the research challenges how robust those plans may be. Examples include those borrowers leaving it close to retirement to switch to a repayment mortgage and others, with limited equity, whose only plan is to sell their home.
Commenting on the research Clive Briault, Managing Director of Retail Markets at the FSA, said: "There is nothing wrong with interest-only mortgages. However, consumers must be very clear about how they are going to repay the loans they take out. Consumers' repayment plans need to be realistic and robust. Consumers should not, for example, assume that house prices will continue to rise at the rate seen in recent years."
