Home owners will have to pass a mortgage affordability test in future from lenders says the Financial Services Authority (FSA) in its Mortgage Market Review discussion paper, which sets out proposals for the future regulation of the sector after the housing crash and banking crisis of the last 18 months. Under the proposals, which are out for discussion until 30 January 2010, self-cert mortgages will also be banned with lenders having to verify borrowers' incomes from now on. No ban is proposed for 100 per cent mortgages though or on certain multiples of borrowers incomes. Similarly, no limit is envisaged on loan-to-value ratios. Neil Johnson, policy manager of the Building Societies Association, gives the industry's response

The FSA's Mortgage Market Review promises the most wide-ranging changes to the mortgage market since the FSA took over responsibility for regulating the sector back in 2004. It outlines how the watchdog sees the future regulation of the mortgage market evolving. While much of the proposals are eminently sensible and will be welcomed by lenders who take their responsibilities seriously, there remain many issues that will need to be resolved with the FSA over the next few months.

The Review's key proposals, covered HERE in our news section, are:
• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay, via scrutinising monthly disposable incomes;
• Banning 'self-cert' mortgages by requiring such verification of borrowers' income;
• Banning the sale of products which contain certain 'toxic combinations' of characteristics that might put borrowers at risk - for instance, giving a high loan to value ratio to someone with a poor credit history;
• Banning arrears charges when a borrower has already arranged a repayment plan;
• Requiring all mortgage advisers to be personally accountable to the FSA;
• Calling for the FSA's scope to be extended to cover buy-to-let mortgages and all lending secured on a home [traditionally, buy-to-lets are treated as a business loan and so fall outside the regulator's remit].

Paramount amongst these proposed changes is the requirement for lenders to check an applicant's income, effectively preventing self-certification mortgages being sold in the future. In the paper the FSA found that around 45 per cent of mortgages at the height of the boom were self-cert. We would agree with them that self-cert should be a niche product for a small group of consumers, and that it should never have reached such a large market share. However, it is wrong to ban them outright. For a small number of people they perform an important function in allowing them access to mortgage finance that they wouldn't otherwise be able to get.

After all, income verification is only one of the checks that lenders can carry out to establish if someone can afford a mortgage. It would be wrong that someone who lacks a traditional employment pattern, or someone who missed one payment, was prevented from taking out a mortgage or remortgaging in the future.

The FSA is also proposing tight rules on how lenders measure affordability. While responsible lenders already undertake a check to make sure that a borrower can afford the loan they are considering taking out, the way the FSA implements this requirement could have a major impact on lenders. One of the ways lenders ensure customers can afford their loans is to tailor affordability models to reflect their particular lending profile and customer base. Should the FSA choose to be very prescriptive about how lenders work out affordability criteria, then lenders could find that they are no longer able to develop models that reflect their particular circumstances. This could again potentially see borrowers deprived of mortgages who would otherwise easily be able to afford them, and we hope that the FSA will work closely with the industry to develop a system that works both for lenders and their customers.

Another potentially significant proposal is that the FSA is considering extending the prudential rules that apply to building societies and banks to all types of lenders. Such a requirement is vital to remove the competitive advantages that such organisations have over more traditional lenders, and the effective removal of the easy ability of these organisations to enter the UK market when times are good, and withdraw when things are more difficult, will bring greater stability to the mortgage market.

In seeking to bring greater regulation to the market, the FSA needs to tread a fine line between ensuring that consumers interests are protected yet lenders have the flexibility that they need to respond to individual customer circumstances. We look forward to working with the FSA to ensure that this is the case, to the ultimate benefit of both lenders and borrowers.

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