Credit rating agency Moody’s said the Financial Services Authority’s proposed changes to affordability and income verification would cause the mortgage market short term pain but that the long term gain was “credit positive”.
The Mortgage Market Review proposals published by the FSA last Tuesday include lenders having to impose stricter affordability tests, mandatory income verification and the possible banning of interest-only mortgages.
A statement from Moody’s said: “We believe these proposals will boost the credit quality of UK bank and building society mortgage portfolios in the long term as new loans will have to undergo stricter underwriting checks compared with existing mortgages in their portfolios.
“Tougher tests enforced and monitored through better regulation are likely to decrease lifetime losses.
“However, in the short term, enforcement of these measures is likely to increase the costs for mortgage lenders and reduce both the number of eligible borrowers and the amount that they can borrow.
“New loan applicants as well as existing non-standard mortgage holders may find it difficult to access mortgage credit or refinance their loans.
“In the short run, a reduced supply of credit to the housing market may exert negative pressure on house prices and simultaneously compress both lending volumes and margins.”
The FSA’s findings showed that loans with an impaired credit history, high loan to values (LTVs) ratios and unverified incomes of borrowers were most likely to default in the future.
Moody’s said its own stress tests reflect similar conclusions with higher expected losses assumed for higher LTVs and non-standard mortgages, including self-certified and buy-to-let segments.
