Fast track and self certification property loans to be banned under proposals from UK financial watc

These kinds of mortgages have been popular with self employed property buyers but under proposals put out for consultation by the Financial Services Authority even they would have to provide proof of their income from an independent source.
 
The FSA is proposing introducing affordability tests for all mortgages to ensure lenders get ‘back to the basics’ of responsible lending. It stopped short of setting out exactly what affordability criteria lenders must use, saying they may decide to carry out a ‘line by line’ assessment of an applicant’s outgoings, or they could use statistical data or their own expenditure models.
 
But affordability must be based on a repayment mortgage, rather than an interest only one, while it must take account of future interest rate rises and be based on a 25 year mortgage term, even if the loan is being taken out over a longer period.
 
It added that lenders advancing money to people with impaired credit histories would have to apply a stricter affordability test and ensure they had a buffer between their income and outgoings, as its research suggests these borrowers were more likely to run into repayment difficulties.
 
The FSA research found that nearly half of all mortgages taken out between 2007 and the first quarter of 2010 were advanced without buyers having to verify their income and 46% of households that took out a mortgage between 2005 and 2008 either did not have any money left or faced a shortfall after meeting their mortgage payments and living expenses.
 
But the regulator said it would not impose restrictions on people taking out loans that combined high risk factors, such as borrowing a high proportion of their property’s value with a high income multiple, as these people were not more likely to get into arrears, unless they had impaired credit histories.
 
The Council of Mortgage Lenders said that the mortgage industry recognises the inevitability of regulatory change but points out that there may also be unwelcome side effects for buyers.
 
In particular getting rid of fast track mortgages will inevitably mean higher administrative costs in processing loan applications, it said. And while the FSA’s proposed conservative approach to assessing available income may indeed make borrowing ‘safer’, it may also make it more difficult for households to get a mortgage, it warns.
 
The CML adds that most cases of mortgage arrears and repossession cannot be attributed to failures in the affordability assessment of the original lending decision. Most cases of financial difficulty occur because of changes in the borrower’s circumstance. It said joint research by the three main advice agencies in December 2009 suggested that over commitment was a feature in only 10% of arrears cases but job loss was cited as a factor in 40% of cases.
 
‘There will always be a regulatory trade off between protecting consumers from over borrowing and increasing the barriers to home ownership. The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending,’ said CML director general Michael Coogan.
 
‘The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future,’ he added