As a consequence any definitive action almost certainly won't happen this year and probably not until after the election. The Turner Report says that any regulation on retail products, particularly mortgages, would be “premature”, but that there needs to be debate on the issue. In his Mansion House speech yesterday Mervyn King made the same point – he said “Whatever exuberance - rational or irrational - existed has been destroyed by the crisis. So we have time to reflect before we decide on the shape of a new regulatory system."
“There is a lot of common sense in this report, but also dangers in some of the issues flagged up for discussion, in particular the possibility of regulating mortgage products and imposing caps on LTVs and/or income multiples. However, the fact that the report has already identified some of the negatives of going down these routes is helpful. For example the report warns that with a cap on LTVs, useful tools like consolidation will be in jeopardy. It also points out that by limiting income multiples the "democratisation of home ownership" will be adversely affected.”
The report also recognises that: "a high LTV would be preferable to a borrower making up the deposit with some form unsecured lending" and Turner said in a briefing this morning that by putting a cap on mortgages the regulator may disadvantage those first-time buyers without family support.
“Some of the conclusions in the report are based on a worrying failure to understand all the dynamics of the mortgage market. Turner comments that the trend in Loan to Income (LTI) ratios has risen rapidly since 2000 and that this ‘in part reflected the fact that borrowers required rising loan multiples to afford higher house prices.’ Whilst this is true there is no recognition of the fact that the other main reason is that borrowers and lenders were progressively becoming more comfortable with higher LTI mortgages as they increasingly recognised that interest rates were highly unlikely to shoot back up to the double figures which often prevailed until the early 1990s.
“Likewise the report quotes Poland as an example of a country with regulatory LTV restrictions, implying that country’s mortgage regulation is one step ahead of the UK’s. What it doesn’t mention is the huge regulatory failure in that country that allowed many borrowers to be sucked into Euro denominated mortgages because of the lower interest Euro rate, but exposed them to huge losses as a result of the zloty’s 22% fall against the Euro over the last year.”
Boulger concludes, “Once the FSA consultative document has been issued in September it will up to the mortgage industry to respond robustly to convince the FSA that product regulation and mortgage caps, of either income multiple or LTV, are a thoroughly bad idea and will reduce consumer choice. “
