Bubble trouble in housing market

By Michael Robinson
BBC File On 4

Is there a bubble in the British housing market? We may soon find out.

Some people have been advised to lie to buy a house

Looking at every investment mania, from the South Sea bubble of the 18th Century to the stock market boom of the 1920s or the dotcom madness of more recent years, you find dubious deals and misleading numbers which helped persuade borrowers and investors to invest more than they should.

Ominously for the British housing market, a File on 4 investigation has highlighted two glaring examples of these bubble characteristics, both of which have encouraged people to borrow more than they should.

On the one hand, there is the overvaluation of buy-to-let properties.

On the other hand is a blatant fraud - lying about your income to get a mortgage.

This has been amazingly effective in getting borrowers mortgages far bigger than they are entitled to, with payments far bigger than many can afford to repay.

At the heart of this scandal is what is called a self-certification mortgage - known as a "self-cert" in the trade.

Borrowers simply state their incomes and lenders do not ask for proof.

Originally designed for self-employed people who had no wage slips, lenders soon made them available to anyone prepared to pay the higher interest rates they charged.

The temptation for mortgage advisers to get bigger mortgages for their clients by falsely exaggerating their incomes is obvious.

We needed the money, so if that's what we have to do then we'll do that Paul Parsons Buy-to-let, boom to bust?

As long ago as 2003, an undercover BBC investigation revealed that nine out of ten mortgage brokers in a West London suburb were advising first time buyers to lie about their incomes on self-cert mortgages to get big enough to get them onto the housing ladder.

With house prices so high, one adviser said the choice is simple: tell a lie or hope you win the lottery.

The effect on house prices of such illicitly borrowed money entering the market can only be guessed at.

But, since exaggerating your income on a mortgage application is unlawful, there are, unsurprisingly, no official figures.

A File On Four investigation for File on 4 has revealed yet another secret self-cert scandal - in Britain's sub-prime mortgage market.

"Sub-prime" is the term advisers use for people with damaged credit records.

In recent years, the sub-prime market has been one of the most profitable for mortgage advisers.

The key mortgage product sub-prime advisers have been selling is to refinancing someone's home to pay off their debts.

As house prices rose, the available equity in people's homes ballooned - the potential for such deals has been enormous.

In the sub-prime market, lenders pay huge commissions and the pressure on brokers to get deals done is fierce.

But mortgage advisers face a problem: though their heavily indebted sub-prime clients may have enough equity in their homes to justify a remortgage, their incomes are often far too small to meet sub-prime lenders' criteria.

When you're in debt and you need a mortgage you do agree with what they tell you Diane Bouncer

Robert Mclean, a former mortgage broker said in the high-pressure sub-prime sales environment, self-certs have been the answer to that problem and are widely used by advisers to get deals done and commissions rolling in.

"If you go to a client that's in trouble but has a low income," Mr Mclean said, "if you can get them to go down the self-cert route, you can declare any income you like to get the deal done, and that's what they use it for."

Paul Parsons, a Londoner with a low-paying job, explained how his adviser secured him a mortgage of over £200,000 - more than eight times his family's income - by "elaborating" on his true income.

His self-cert application form, filled in by his mortgage adviser, states that, in addition to his basic salary, he earned £5,000 in overtime payments, £2,000 in commissions and £9,000 from self-employed building work.

Genuine wage

His wife is shown as having nearly £10,000 of freelance earnings on top of her genuine part-time wage.

Mr Parsons said none of these additional earnings were true. But he took his broker's advice and signed the form.

"We needed the money, so if that's what we have to do, then we'll do that," he said.

Not surprisingly, he was unable to meet the large monthly payments on his loan - they took up most of his family's income - and before long, his lender moved to repossess his home.

'Income lies'

In Wallsall, Diane Bouncer told us she and her husband Mark had remortgaged their home four times to clear their debts.

The lies about their income started from the beginning.

"When you're in debt and you need a mortgage," Mrs Bouncer told us, "you do agree with what they tell you."

In a statement following this week's report, the IMLA, the trade body representing most self-cert lenders, acknowledged that there were "some problems" with self-certification mortgages but said, "We would refute the suggestion that these practices are commonplace."

However, an extensive review of the sub-prime mortgage market by the Financial Services Authority (FSA) found that more than half the sub-prime borrowers surveyed had taken out self-cert mortgages.

'Crackdown'

The FSA commented: "It was not clear in many cases why they had been advised to do this."

The FSA declined to be interviewed on why it thought so many self-certs were being issued.

But in a statement after the programme, the authority said it would "crack down on this abuse".

This story was broadcast on File On 4 Tuesday 25 September 2007 at 2000 BST and repeated on Sunday 30 September at 1700 BST.