Page last updated at 09:24 GMT, Monday, 19 October 2009 10:24 UK

Tougher scrutiny for home loans

Lord Myners on mortgage refoms and banking bonuses

Borrowers face a mortgage affordability test from lenders amid plans by the Financial Services Authority (FSA) to step up the regulation of home loans.

Self-certification mortgages will be banned under the proposals with lenders required to verify borrowers' incomes.

FSA chief executive Hector Sants said that some people who were able to get home loans in the boom would no longer be able to under the proposed rules.

The industry will have until 30 January 2010 to comment on the plans.

The FSA, in its mortgage market review, has outlined a series of proposals for increasing regulation in the mortgage market.

If we think it was too easy to get a loan in the boom years, then the 'solution' has to involve making it harder. At least for some people. The challenge is to make sure it's the right people
BBC economics editor Stephanie Flanders

All borrowers will have to show they have sufficient spare income to finance the repayment of their new home loans.

However, the FSA drew back from any ban on 100% mortgages, or any limit on loan-to-value levels. There was also no ban on loans over a certain multiple of borrowers' incomes.

However, it did not rule out such caps in the future, if the initial proposals failed to have a "sufficient effect".

The plans, which the FSA described as more "intrusive and interventionist", include:

  • Making lenders ultimately responsible for assessing consumers' ability to pay by studying borrowers' monthly disposable income
  • Banning the sale of "toxic combination" loans, such as a high loan-to-value loan for somebody with a poor credit history
  • Stopping charges for borrowers who have got behind on payments, but are keeping to an arrangement to repay these arrears
  • Extending policing of the industry by the FSA to all mortgage advisers and arrangers.

"We need a new approach to regulation," Mr Sants told the BBC.

He said that the irresponsibility of the past that put firms and consumers at risk should not be repeated.

"In the past, the prevailing regulatory philosophy was definitely based on the notion that banks would behave properly and not put themselves at risk and not put consumers at risk," he said.

"I think we just have to recognise that both firms and indeed consumers just don't always make the best decisions. They don't always act in their their best interest or indeed in the best collective interest of society. So we need a new approach to regulation."

Ban plan

The most striking proposal is the ban on self-certification mortgages - the type where customers do not have to prove their income - as these have been associated with a disproportionately high number of arrears and repossessions.

It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of 'irresponsible lending'
Council of Mortgage Lenders

When the FSA first took over the regulation of mortgage selling in October 2004, it proposed that borrowers who were not self-employed should not be allowed to self-certify their incomes. The mortgage industry lobbied against that idea and the FSA relented.

These loans made up nearly half of all the mortgages being offered at the peak of the housing boom, but have been at the centre of a number of mortgage fraud inquiries, when incomes were allegedly inflated by rogue brokers looking for higher commissions.

This led them to be dubbed "liar loans" by some commentators.

If the ban now comes in, lenders will be able to look at the tax returns of self-employed people - who have often used self-certification loans - for evidence of their income, the FSA said.

The regulator's review came after the mortgage market mushroomed during the housing boom, with some 10,000 different mortgage products available at one point in 2007. Of these, 3,000 were specifically aimed at sub-prime borrowers - those who have inferior credit records.

"That is a level of complexity we could well do without," Mr Sants said.

He added that lenders needed to give proper consideration to how much a borrower could afford, in what was often their most important financial decision.

Why would you consider lending someone money if they couldn't afford to repay it?
Shirley Thomas, Rayleigh

Residential mortgage debt in the UK amounts to around £1.23 trillion, accounting for approximately 70% of all credit extended by lenders in the UK, the regulator said.

The FSA also wants the power to regulate buy-to-let mortgages, which are generally treated as business loans, and so currently fall outside the FSA's scope.

The UK mortgage market has recently started to pick up slightly after dropping sharply during late 2008 and early 2009.


The Council of Mortgage Lenders (CML) described the FSA review as "well thought out and logical", but described some of the political comment surrounding lending as more "rabble-rousing" than considered debate.

"It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of 'irresponsible lending'," the CML said.

John Luke Busby, director of French mortgage group Athena Mortgages, said: "The FSA, it would seem, has been looking across the channel to France for direction when drafting its proposals.

"The French banks have carried out affordability tests for all types of borrowing, whether buy-to-let or owner-occupier, for years and if you look at historical house price trends in France there is a far more gentle variation in prices as opposed to the booms and busts seen in the UK."

Mortgage approval bar chart

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