FSA fails to understand the mortgage market
The Financial Services Authority’s Mortgage Market Review was published yesterday and although you are not at risk of getting autism from this MMR there will be a significant amount of consumer detriment if the report’s proposals to ban self certification mortgages are adopted.
Out of the UK’s 10 million residential mortgages about one million, or 10%, 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.
For many who don’t want to move this will not be a problem in the short term as many will revert to a reasonable variable rate when their initial deal finishes. However, when the time comes that they want to switch to a fixed rate they will only be able to do so if their current lender is prepared to offer them a product transfer rate.
Many self cert borrowers will have their mortgage with a lender which has exited the market and will have no choice but to stay on their revert to rate. If they are not able to switch to a fixed rate when they want to, purely because of the FSA’s ban on self cert mortgages, this obviously increases the risk that their mortgage will become unaffordable if interest rates increase too steeply.
If this results is them going into arrears and, worse still, being repossessed, the FSA will be culpable.
One of the FSA’s statutory duties is to protect consumers, not increase the risk that their mortgage becomes unaffordable!
Part of this full frontal attack on self cert mortgages, which is a perfectly valid product for some borrowers, seems to be based on a major misunderstanding by the FSA of income non-verified mortgages. In the regular returns the FSA requires lenders to submit there is a requirement to specify the proportion of mortgages they sold which were income non-verified.
In asking for the information on this basis, rather than asking for the proportion of self cert mortgages and the proportion of mortgages which were fast tracked, I can only assume that the FSA did not understand the difference between the two. If it did surely it would have asked for two separate figures.
In the spirit of helpfulness I would advise the FSA that self cert is a product where the lender guarantees not to ask for proof of income, whereas fast track is a process where on a mainstream mortgage the lender exercises their right not to ask for the normal paper proofs because they determine that the mortgage is low risk on the basis it has a low LTV, a loan size below a certain level and the applicant’s credit score was good.
Lenders may not (yet) be able to get applicants’ DNA from the credit reference agencies but they can and do get an awful lot of financial and other information.
It is on this basis that ID verification can often be done electronically and sufficient information obtained for the lender to safely cut down on the paper proofs required.
If the credit score is not very useful in making this decision why do lenders, the FSA and the rating agencies all regard it as being so important?
The FSA really can’t have it both ways - either the credit score is a valid tool in assessing mortgage applications or it is not. If it is but the same paper proofs are required for an applicant with a high score as someone with a low score what purpose is it achieving?
On the Today programme Hector Sants, chief executive of the FSA, said: “in the boom times self-cert mortgages were around half of those offered.” This claim is complete nonsense and it is very worrying that the FSA is trying to set policy on the basis of such a serious misunderstanding. It is true that about 50% of mortgages were income non-verified, but only about 10% were self cert.
The arrears record on fast track mortgages is generally better than average, which is exactly what one would expect if the system is working properly, because they are the mortgages the lender has identified as low risk.
This compares with self-cert mortgages having an above average arrears record, which again is exactly what one would expect. This extra risk needs to be priced properly, which wasn’t always done in the run up to the credit crunch, but with correct risk based pricing self cert mortgages are a perfectly valid option for borrowers.
I will leave you with this thought. Over 50% of the population don’t understand percentages but I was shocked to discover that this 50% includes the senior management at the FSA.
No doubt the MMR will have been checked and double checked before being signed off for release but on page 47, section 4.47, it says that “property values increased by almost 300% in the decade before the onset of the financial crisis.”
This didn’t look right to me and so I checked it out with the Nationwide house price index. Sure enough from Q3 in 1997 to Q3 in 2007 this reported an increase of 203%. I suspect the wise heads at the FSA thought that a 3 fold rise in property prices was equivalent to a 300% increase. Oh dear!
Ray Boulger - Boulger's Blog - Mortgage Strategy
Posted 21/10/2009 07:38:31 |
