Regulator to ban self-cert mortgages

Tuesday 13th October 2009

Self-certification mortgages, the loans used by self-employed mortgage holders are set to be killed off by regulator the FSA, which will compel all lenders to demand evidence of proof of income.

The initiative will be part of the FSA’s keenly awaited mortgage review, set to be published which early next week, according to an exclusive in The Times.

The sweeping report is also targeting buy-to-let mortgages, which could be regulated for the first time, said the paper.

Self-certification mortgages, also dubbed liar loans, accounted for one third of new loans in 2007, or about GBP 100 billion of the GBP300 billion loans granted that year. Buy-to-let accounted for 12 per cent of all properties, or more than three million homes in the same year.

But new loans in both sectors plunged to almost zero in the past year as lenders have deserted the riskier parts of the housing market.

Self-cert loans have been one of the fastest-growing parts of the mortgage market in recent years. They were mainly targeted at the self-employed or those with mulitple income streams who find it tough to prove their irregular income streams.

Unlike standard mortgages, for which customers must provide pay slips and other documents proving salary and expenditure, self-cert loans require far fewer documents and rely more on customers’ declarations that they can meet their repayments.

However, in the donwturn defaults on self-cert mortgages have been at much higher rates than the industry average.

HBOS and Bradford & Bingley were among the biggest self-cert lenders. HBOS was sold to Lloyds TSB in a rescue deal in September last year and B&B collapsed and had to be partially nationalised.

The FSA is also considering regulating buy-to-let loans for the first time. That could require professional landlords, who may have portfolios of 500 properties, to fill in the same forms that individual homeowners have to complete. Such a move would be inappropriate, experts assert, and could further stifle buy-to-let lending, which has also nose-dived in the past 12 months.