High-risk mortgage lending rapped

Jon Pain said lenders should check borrowers' ability to repay loans

Some specialist mortgage lenders have been so reckless that 30% to 60% of their borrowers are now in arrears, the main City regulator has said.

Jon Pain of the Financial Services Authority (FSA) was speaking to the annual conference of the Council of Mortgage Lenders (CML) in London.

Mr Pain was justifying the FSA's recently announced plan to bring in new rules to restrict mortgage lending.

But the CML's chairman said the regulator's plans were too restrictive.

"Increasingly, I also have the feeling that regulators see lenders and intermediaries as the sweetshop owners - or worse, the drug-dealers at the school gates - of the mortgage market, enticing innocent consumers in and then getting them hooked, for their own evil profit-driven purposes," said the CML chairman Matthew Wyles.

Risky strategies

Last month, the FSA launched a consultation on its plans for stiffer regulation of mortgage lending.

We want lenders to get back to the basics of responsible lending Jon Pain, FSA

Its key proposals were that so-called self-certification mortgages should be banned altogether, and that all mortgage applicants should face much tougher scrutiny of their ability to repay their home loans.

Mr Pain said some banks and building societies had lent recklessly, which was now reflected in high arrears levels.

But he said the worst offenders were the specialist "non-banks" who had taken 20% of the mortgage market by 2008.

He said a large number had high-risk lending strategies that combined relatively large loans, with no checks on a borrower's income, and borrowers who had poor credit records and who were also borrowing to pay off other debts.

"Their expansion was pursued primarily into new, higher-risk consumer segments, with very limited and vulnerable means that had previously enjoyed only limited access to mortgages," Mr Pain said.

He added that these lenders might be regulated in future, like banks and building societies, to make them more prudent.

Complex issues

Plenty of self-cert borrowers are complicated rather than dishonest, and it is simply wrong to see all self-cert as 'liar loans' Matthew Wyles, Council of Mortgage Lenders chairman

Mr Pain admitted that the FSA's suggested ban on self-certificated mortgages, where people do not have to prove how much they earn and how much they can afford to repay, was controversial in the mortgage industry.

He denied it would lock out about three million self-employed people from the mortgage market as they should be able to prove their incomes anyway if they were genuine.

"We want lenders to get back to the basics of responsible lending," he added.

"Everyone who takes out a mortgage should be able to repay it, they should have some evidence that they can repay it and lenders should take note of that evidence."

However, the CML's Mr Wyles said the FSA was in danger of going too far.

"Plenty of self-cert borrowers are complicated rather than dishonest, and it is simply wrong to see all self-cert as 'liar loans'," he argued.

'Proper assessment'

Mr Pain rejected the suggestion that the FSA's new approach would force lenders to check the fine details of how people spent their own money.

"We do not expect you to turn into a band of private eyes, prying into your customers' private lives and asking them how much they spend on alcohol and cigarettes as some papers have reported," he said.

"What we do want is for lenders to look beyond simple income multiples, credit checks or other scoring mechanisms to a proper assessment of whether the borrower can actually afford the loan," he added.

Mr Pain went on to argue that the boom in mortgage lending between 1997 and 2007 had not widened home ownership in the UK, as some claim.

While prices rose by 200% in that time, the number of owner occupied homes rose by 9% to 14.7 million, but the number financed by a mortgage actually fell by 2% to 8.2 million.