Stephen Knight, CEO

Yesterday, the FSA published its long-awaited review into the mortgage market.  There is too little space here to analyse the paper in full.  But set out below are what we believe to be the 12 main points affecting our market, and yours, with our commentary alongside. 

 

1. Lenders will be required to hold more capital and liquidity. Inevitable following the recent crisis, but the result will be less and more expensive funds available in the mortgage market.

 

2. No ban on high LTV mortgages, but reminding us that such a ban exists in Austria, Poland, China and Hong Kong.  Not sure where the comparisons are taking us, but good news nonetheless.

 

3. No limit on loan-to-income, but more verification of income and expenditure.  The current proposal requires the lender to assess “the level of a consumer’s expenditure in determining the affordability of a mortgage product.” As it stands this will create an onerous and judgemental approach to decisioning – future applications will take longer, be more prone to individual opinion, and more open to dispute and arbitrary rejection.

 

4. Self cert is dead.   We will not be offering self cert, but this regulatory shift is a concern for those borrowers who are paying their existing self cert mortgages, and now find themselves stranded on their current product.   The removal of self cert creates a regulatory barrier for these borrowers – more thought is needed to help these current borrowers.

 

5. Regulation extended to all secured loans including second charges and buy to let.  Expected.

 

6. No more “layered risk” where one or more of the following components may not be present in a mortgage advance, i.e. high LTV; no income verification; credit-impaired borrower and lending to debt consolidation.   We believe the FSA is right to take this stance.

 

7. Arrears charges banned where borrowers have entered into an arrangement to pay back arrears by regular contribution.  This is in line with our views – where borrowers are paying back arrears and working with lenders, the costs of managing this arrangement are minimal. This aligns the FSA position with the current FOS views on arrears fees.

 

8. Interest only loans to be underwritten as if they were capital and interest.  This reiterates current rules under MCOB that require lenders to “take account of the cost of any associated repayment vehicle and, if no such repayment vehicle is specified, ‘may’ base their calculations on an equivalent repayment mortgage”.  As such, it is in line with our and most lenders’ current approach.

 

9. Limits on equity withdrawal.  We cannot see the justification for this which will negatively impact borrowers’ choice, flexibility and resultant spending in the economy. 

 

10. Regulated intermediaries will be directly responsible to the FSA for distribution and advice.  We support this stance in principle.  However, it will certainly increase the resource that the FSA needs to manage the intermediary market, and there’s a risk that this will in practice lead to spreading efforts too thinly.

 

11. New rules will be targeted at the “non-banks”, including the possibility of regulating purchasers of mortgage portfolios as if they were the first lender of record.  Too early to say how this could work.  The current, tragic shortfall between equilibrium supply and demand, and current mortgage availability, can only be made up by the international capital markets, so any mechanism that slows that down is bound to impact borrowers’ choice and the availability of mortgage finance.

 

12. Abolition of capitalised arrangement fees.   It will suit some borrowers to capitalise a higher fee and pay less on the monthly payment.  Regulation down at this level of detail could be market-harmful. 

 

Remember, this is a discussion paper so, if you have views that you want the FSA to take into account, you will need to answer the questions they have posed by January 2010.  Although, in response to the feedback, the FSA may consider withdrawing or amending some of the above new requirements, I would plan your life on expecting most of it to be introduced in the second half of 2010, except for the regulation of second charges and BTL – this will take longer as it changes the FSA’s remit and requires parliamentary approval.