Ed Harley, director of mortgage policy at the Financial Services Authority, told Mortgage Introducer that short term "adjustments" were necessary as part of the Mortgage Market Review transition process to achieve a sustainable mortgage market for the future.
He also said concerns about the transition period from current regulation to new regulation proposed in the MMR will be carefully considered as a separate issue once regulation is confirmed, adding that the FSA was aware of the problem facing existing borrowers on self-certification and fast-track mortgage deals who may be left unable to remortgage under new regulation.
He told Mortgage Introducer: “The important thing is to ensure we have a sustainable mortgage market that works in the future.
"But what happens to those borrowers who already have deals with lenders on a fast-track or self-cert basis is clearly a very important issue and one we will look at carefully as part of the transition process.
“We need to ascertain a meaningful affordability measure for all mortgages across the board and a good understanding of the borrower’s income is important.
"We acknowledge that statistics show that borrowers on fast track loans showed lower than average arrears, but the concern is that in the past self-cert was a product through which higher risk loans were routed.
“If we apply income verification to self-cert and not fast-track, there is a worry that those higher risk loans may be re-routed through fast-track. That’s why we are applying meaningful affordability measures to all mortgages.”
He added that the FSA is always open to further evidence from the industry if it considers the regulator has not considered all possible and probable outcomes from this consultation paper, but that he thought the evidence presented in consultation paper 10 on responsible lending was extensive.
“These are well thought-out and considered proposals and they are well founded. We do take into account feedback from lenders and especially feedback on areas where we were previously quite green. For example we tightened our attitude to interest-only mortgages after receiving feedback from various lenders saying they should be banned.”
The consultation paper states that: “To prevent the stretching of affordability seen in the past, through the use of interest-only and the extending of mortgage terms, we are proposing that affordability assessments must normally be based on a capital and interest basis, even for interest-only mortgages; and on a maximum term of 25 years, even where the actual term is longer.”
Harley added that they not proposing to ban interest-only deals, but that tighter requirements on affordability testing are necessary to prevent borrowers abusing interest-only deals to stretch their own affordability and increase the amount of debt they can borrow.
He said: “We had a much stronger than anticipated response from lenders on this subject, citing concerns that borrowers were applying for interest-only deals purely to stretch their affordability and the size of loan. Clearly that’s a concern from the consumer perspective, but it could also cause more problems from an industry perspective.”
Many in the industry have voiced concerns about the future prospects of getting a mortgage for self-employed people, particularly if the FSA bans self-cert outright.
Harley said: “These proposals shouldn’t restrict loans to the self-employed. They just mean that self-employed people will have to show meaningful third party evidence that demonstrates the income they’re claiming to have. We will be quite flexible on the form of that evidence, but do believe that all mortgages should be able to demonstrate affordability.
“These proposals are restricting the market only insofar as they restrict loans that are unaffordable.
"We don’t think offering unaffordable loans helps anybody and believe that restricting this type of lending will be a benefit to the market and wider economy in the longer term.
“We expect to see a small positive macro-economic impact following the proposals in terms of the reduction in volatility – booms and busts are not good for macro stability.
"We’ve considered the impact this will have on the wider economy carefully, but we have to take a long term view.”
The Council of Mortgage Lenders said this morning that the market had already corrected itself and was not offering self-cert mortgages.
But Harley said: “The key point is that lending has to be affordable.
"We accept that the CML is correct, the impact on behaviour of the market as it’s operating currently will be smaller than if we’d introduced these measures three years ago, but we have to take a long term view.
"These proposals are about how the market should be operating today and in the future as well.”
