Self-cert: Sledgehammer to crack a nut?

Thursday 22nd October 2009

By Phil Whitehouse, head of The Mortgage Alliance (TMA)

The FSA’s mortgage market review discussion paper has dominated the news recently. The calls for self-cert mortgages to be banned, affordability tests on all mortgages and for buy-to-let to be regulated are obviously the headline grabbing elements of the paper but these were not wholly unexpected measures. Looking more in depth at the review the key features outlined were;

· Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
· Banning ‘self-cert’ mortgages through required verification of borrowers’ income;
· Banning the sale of products which contain certain ‘toxic combinations’ of characteristics that put borrowers at risk;
· Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
· Requiring all mortgage advisers to be personally accountable to the FSA;
· Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home.

While the regulator says that there will be no read-across of the Retail Distribution Review to the mortgage market, it reports that it wants to apply the RDR’s adviser categories of ‘independent’ and ‘restricted’. It argues that the current labels of ‘whole of market’, ‘single’ and ‘tied’, “are not enhancing consumer understanding”.

It has also identified that the irresponsible lending practices seen in the market until recently will be curtailed by the FSA’s existing work on capital and liquidity.

The FSA says that the proposals are designed to tackle the problems identified while maintaining a vibrant and sustainable market. But the FSA has not ruled out further change if the initial proposals do not have sufficient effect, including caps on loan-to-value, loan-to-income or debt-to-income.

The mortgage market now has until January 30 2010 to respond to the consultation paper and the FSA will be actively seeking views from consumer groups and the industry. A feedback statement will be published in March. Implementation will be phased, with the focus on speed for areas of high detriment, such as arrears.

In assessing the key factors there appears some sense behind them but as with everything, how these are practically implemented is vital to their success and the knock on effect to brokers and, of course, the end consumer.

Responsible lending is obviously the key element behind the featured proposals and this is vital in moving the industry forward. The majority of lenders have worked hard to address these concerns but making them ensure that they have increased responsibility for affordability levels will work to strengthen this further.

The subject of FSA action regarding self cert mortgages is bound to raise a few hackles within the intermediary community and rightly so. The FSA’s interpretation of self cert and fast tracks seems to leave a bit to be desired. Fundamentally self cert mortgages should be founded on responsible lending principles and when properly advised upon remain an important, if relatively select, component in the mortgage market. The FSA would do well to remember this before taking introducing the old sledgehammer and nut routine. It is vital that the regulator illustrates a proper understanding of this sector as there appears to be many commentators questioning whether it really does. It is a fine balancing act that needs to be performed. It is easy to see the FSA’s concerns as this is an area that does warrant greater scrutiny but it is also important to ensure that this does not unduly restrict existing borrowers from having full access to the entire mortgage market.

The industry has a few months to respond to this paper and whilst debate will continue let’s hope that some sensible observations are taken into account by the regulator in order to help keep the industry moving forward.

Phil Whitehouse is head of network, The Mortgage Alliance. The Mortgage Alliance has a loyal data base of 7,000 Directly Authorised mortgage intermediaries and as with most firms operating within the mortgage market it is having to overcome a number of obstacles in order to help members write business. He previously worked as a senior manager for Pink Home Loans and spent 25 years with Halifax/Leeds Permanent Building Society running various high street branches. Phil enjoys golf but says: “No matter what I do I cannot get any better and I beat myself up crazily about something that on the face of it is such a simple game."