The FSA and the self-cert question

Wednesday 18th November 2009

By Michael White, chief executive, Email Mortgages

This month’s blog can really only focus on one organisation, the FSA, given the all-encompassing impact it is currently having on the mortgage sector.  The Mortgage Market Review (MMR) has thrown so many grenades into the marketplace that brokers could be forgiven that they’re currently appearing in their own equivalent of ‘Modern Warfare 2’ – a reference for the gamers out there.

When you hear the normally conservative CML, or rather its Chairman Matthew Wyles, suggesting the FSA sees mortgage lenders and brokers like ‘drug dealers at the school gates’ then it’s apparent we’re in somewhat unchartered territory.  We should not underestimate Wyles’ pursuit of headlines, however, it is still a powerful comment and suggests that there is a rather large distance between regulator and regulated.

Coming back to the MMR it is clear the FSA’s recommendation to kill off the self-cert market shows just how far removed it is from the realities of the mortgage industry.  As Ray Boulger revealed, out of the UK’s 10 million residential mortgages about one million, or 10 per cent, were arranged on a self-cert basis and a large proportion of this sizable minority of borrowers are at serious risk of being denied the opportunity to ever get another mortgage, even when conditions in the mortgage market improve.

Thus they will be condemned by the FSA to stay in their current home when they want to move, unless they are prepared to sell up and rent.  They will also be denied the opportunity to remortgage and thus be left to the tender mercies of their current lender.

There is obvious confusion at the FSA with regards to the difference between self-cert and fast-track.  Because of this mis-understanding (and I’m being very gentle with the FSA at this point) the regulator seems to believe that in the ‘boom times’ 50 per cent of mortgages were self-cert when the figure is actually nearer 10 per cent with the remaining being income non-verified/fast-track.  The question of whether fast-track actually works should also be addressed.  Yes, it does because of sophisticated credit score tools that identify the loans as lower risk.  This also means typically the arrears profile is better than average.

The idea of banning ‘self-cert’ is nonsense.  Such action will essentially exclude the very entrepreneurs which aid the recovery for a country emerging from a recession, as was the case in the early 1990s.  Yes, there can be extra vigilance imposed in the shape of self-employed only and restricted LTVs, etc but to remove the product completely bears no reflection to the facts.  Even the FSA acknowledges in the MMR that, “…the market has worked well for many consumers: the vast majority of mortgage borrowers will come through this recession meeting their mortgage payments and keeping their homes”.

A not insignificant number of these mortgage borrowers will have obtained self-cert mortgages. We should not forget, again using the words of the FSA: “A lot of people now own their own homes (many of them outright) when previous generations would never have been able to do so.”

Ultimately, I have real concerns with regard to the FSA in that it certainly appears to have established a culture of self-aggrandisement, as well as being unable to differentiate between different mortgage products.  Like everything to do with this ‘Credit Crunch’ certain ingredients have been massively overstated for effect.  Self-cert or variations being cases in point. 

At present there appears to be the twilight world of the FSA and then the real world.  Hopefully, we can negotiate some sensible middle ground; if not then things are likely to get worse again before they get better.

Michael White is both founder and chief executive of online mortgage advisers, Email Mortgages. Email Mortgages was established in 2008 and is a mortgage advisory practice providing consumers with tailored fee-free advice online via email.  Michael has been working in financial services for over 30 years and been involved in a number of new business start-ups including Chase Manhattan Homeloans, Legal & General Mortgage Services and Kensington Mortgage Company.  His last job prior to Email Mortgages was as founding director of the lender London Mortgage Company, established in 2001 and sold to Lehman Brothers in 2006.