The need for consumers to be given advice before being granted a mortgage are regarded as necessary but some experts believe they could hold back a recovery in the housing market and say that they fail to deal with the problem of those who have interest only mortgages with no means of paying off the loan.
The Council of Mortgage Lenders said that it was pleased with the focus on affordability for the borrower, and verification on the part of the lender, to ensure that lending is responsible.
‘Today’s rules bring certainty. Lenders can now make firm plans to ensure that they meet the new requirements when they formally come into place in April 2014. In practical terms, the regulatory changes have already been widely anticipated and so are unlikely to create any significant additional or unexpected impacts,’ said Paul Smee, CML director general.
‘We look forward to working towards implementation with the FSA and its successor, the FCA, and hope that from a supervisory perspective the regulator will focus just as much on helping lenders and brokers to meet regulatory expectations as on enforcement action if rules are broken,’ he added.
The Intermediary Mortgage Lenders Association (IMLA), the trade association for UK lenders involved in the generation of mortgage business through professional financial intermediaries, said that the new rules include a lot of common sense.
‘As intermediary lenders we recognise the importance of advice and in the new regime most borrowers will be required to take advice, this will no doubt improve outcomes for the majority of consumers,’ said Peter Williams, IMLA executive director.
‘The FSA has had to deal with the problem of existing borrowers trapped in mortgages taken out under the old regime still having access to the market under the new rules and it has sought to make its transitional rules more flexible in this respect. While IMLA recognises the efforts the regulator has gone to in order to help such customers, there are concerns that lenders may not be able to bring solutions forward unless there is the prospect of being able to price adequately for the risk,’ he explained.
‘It is also clear that higher LTV loans to first time buyers have not been banned and nor have interest only loans, with the critical focus rightly remaining on affordability. Both are sensible components of a modern and diverse mortgage market. Our initial view is that its new rules will not damage the market but that they will also do little to reinvigorate a housing market that remains at a low ebb. Given the UK needs to see sustained economic growth and within that a growing and competitive mortgage market it is hard to see these rules bringing new vitality to the market,’ he added.
Brian Murphy, head of lending at the Mortgage Advice Bureau, said that a lot of what the FSA is saying is just codifying common good practice such as checking borrowers can afford repayments and that those with interest only mortgages take out a suitable repayment vehicle.
‘However, a key change for the market is the amendment to advised sales, which state most mortgage sales will soon have to be advised. This will add to borrower protection and is clear recognition of the important role of independent mortgage advisers who counsel borrowers as to the most suitable product for their needs from across the market,’ he pointed out.
‘It’s also great news for all those existing borrowers who’ve been trapped by tighter affordability requirements, the so-called mortgage prisoners. With immediate effect lenders have been told to use their judgement on affordability requirements for borrowers with a good payment history, which will prevent them offering less favourable interest rates or other terms and allow more borrowers to remortgage and even move lender,’ he added.
Bill Warren, managing director of Warren Compliance, said that the new rules represent good news for the intermediary in the main. ‘The ruling that face-to-face and telephone sales must be advised removes consumer confusion and strengthens the significance of what mortgage brokers do. The requirement that all sellers must have relevant mortgage qualification also levels the playing field and comes eight years after this became mandatory for brokers after M-Day. The consumer can only gain from this enhancement of professionalism,’ he explained.
‘In terms of interest only mortgages I think common sense has now prevailed and there is now no reason for lenders to treat it as high risk. The recent over reactions of lenders in withdrawing from this market have been anti-consumer and out of touch with what borrowers want and need.
‘Placing more responsibility on lenders to account for affordability is another sage move, although intermediaries must be clear about each lender’s approach and the third party distribution channel as a whole must ensure lenders don’t use this as an excuse to ease them out. Income and expenditure recording within the sales process will also be critical, as will individual lenders’ interpretations and the FSA has sensibly positioned the responsibility with the lender to ensure that both employed and self-employed customers are treated fairly,’ he added.
Consumer organisation Which? chief executive Peter Vicary-Smith said he believes the new rules will hopefully prevent a return to the irresponsible lending of the past.
‘But it’s disgraceful that banks encouraged so many people to borrow more than they could afford without proper checks. The banks have a responsibility to help these people who are now struggling through no fault of their own,’ he pointed out.
‘The housing market is failing not just one but two generations of consumers, with many mortgage prisoners trapped with their current lender and young people excluded from the housing market altogether,’ he added.
He wants banks the FSA to go further to make sure banks are fair to hard pressed borrowers trapped on Standard Variable Rates and exposed to rising mortgage payments.
‘More than 1.6 million people have been hit by increasing SVRs despite the Bank of England base rate remaining unchanged for more than three years. The banks must pass on lower borrowing costs from the Government’s Funding for Lending Scheme,’ he said.
The Financial Services Consumer Panel said the regulator will need to supervise the new rules carefully and consistently to ensure good outcomes for borrowers and added that challenges remain about some parts of the package.
It considers the introduction of new rules for ‘mortgage prisoners’ to be particularly welcome and has urged the FSA to ensure that it exercises vigilance when monitoring firms’ compliance. The Panel will also monitor the revisions to the rules around the provision of advice as these develop.
‘The FSA has listened to our concerns and ideas in a number of areas, particularly on mortgage prisoners, and is taking action to prevent exploitation and abuse by firms. As we have flagged all along, relying on the principle of treating customers fairly alone is clearly not enough,’ said Adam Philips, Consumer Panel Chairman.
‘It is vital that vulnerable consumers are protected but in a manner that does not deprive the creditworthy from accessing mortgage finance. We believe these aims would have been more easily achievable had the FSA accepted in full our recommendations regarding mortgage prisoners, the estimation of living costs, interest rate stress testing, and the timing of implementation. An even greater burden will be placed on supervisors and enforcers to adopt a consistent yet flexible approach,’ he explained.
‘Supervision and enforcement are, in any case, the keys to the effectiveness of the MMR as weaknesses in these areas materially contributed to regulatory failure during the pre-2008 housing market bubble. This is why the Panel urges vigilance in implementation. A number of the new regulatory rules are very welcome, but it would be unwise to consider that this is yet a job done,’ he added.
Richard Sexton, director of e.surv chartered surveyors, said that the new rules don’t solve the real problem, which is the outstanding balances of existing interest only mortgages, not assessment criteria for new ones. He explained that the problem built up in the mid to late 2000s, when up to a third of all mortgages were interest only. Around three quarters of these have no specified repayment strategy.
‘Worryingly, the FSA has said the assessment of these interest only mortgages was less robust. Put simply, swathes of borrowers were granted interest only mortgages when they couldn’t afford them. Lenders and borrowers were betting that house prices would carry on going up and the balance would be paid off that way. It was a gamble that has badly backfired. Now house prices have fallen sharply, lenders and borrowers are up the proverbial creek without a paddle,’ he said.
‘There are already around £120 billion in interest only mortgages with no repayment plan to mature by 2020. Most of these mortgages were granted in the mid to late 1990s, so don’t even reflect the most dangerous and unsustainable period of interest-only lending in the mid to late 2000s. The outstanding balance of mortgages granted just before 2008 will be even higher than £120 billion, and more of the borrowers will be unable to repay the mortgage, Sexton pointed out.
‘Reviewing repayment strategies half way during the mortgage term won’t solve the problem. The FSA is saying it’s up to the borrower to find a repayment strategy. That’s a tectonic problem for the market. A big chunk of interest only borrowers have no means of repaying, particularly the ones who got an interest only mortgage when the market was basking in the glow of unsustainably easy access to credit just before 2008.
‘Falling house prices have eaten away chunks of equity, and high inflation combined with low savings rates means it will be impossible for lots of borrowers to repay their interest only mortgage before it matures,’ he explained.
‘Today, lenders are much more considered in their approach to interest only lending. There remains a place for it in the market if done responsibly. However, if more lenders pull out from the sector, we may see a domino effect where most major lenders shelve their interest only products,’ he added.
James Moss, managing director of Curzon Investment Property, a leading independent agent in London, said he believes that the new measures are draconian and could repress the much anticipated housing recovery.
‘Mortgage lending in the UK is at an all time record low and this is what drives house building. House builders only build to demand, so unless we help buffer up demand, they will not build more as it is not in their interests to. You can over regulate as well as under regulate and these measures appear very excessive and out of balance for the consumer,’ he said.
