Spotlight: Final review

The prospect of many existing borrowers becoming mortgage prisoners based on the FSA’s Mortgage Market Review (MMR) proposals appears to have receded.

It was feared that, based on some of the regulator’s initial proposals covering affordability rules in its earlier MMR papers, many perfectly creditworthy borrowers might be unable to negotiate new mortgage deals because they failed to meet stricter income verification requirements.

In its latest and final review paper, published a week before Christmas, the FSA appears to have taken on board many of the comments made on its earlier proposals. The report, which runs to nearly 600 pages, has been well received. The CML has described the latest proposals as “far more workable and appropriate than those contained in previous consultation papers” and seeming to “strike broadly the right balance”.

The Intermediary Mortgage Lenders Association (IMLA) says that the paper “shows many positive signs of the FSA listening and responding to the industry” and that it appeared to “offer a common sense approach”.

The FSA has firmly rebutted critics who suggested that there was no need for the MMR. They argued that irresponsible lend-ing has diminished as lenders eschew risk for safer, more attractive looking borrowers.

It points out that the reduction in riskier lending has come about because of the lack of funds available in the mortgage market. It is concerned that, as money returns to the market, lenders will come under pressure to consider riskier lending as they seek to increase their market share. It says that it is important to ensure that better lending practices are put in place for the future when memories of the crisis recede and the dangers of poor practice return.

Key proposals

Although the paper inevitably covers a wide range of topics, the FSA says that the proposals that will have by far the biggest impact are those associated with the requirements on responsible lending and affordability. In the current regime, it identified the failure to perform proper affordability checks as one of the key underlying issues. It explains that one of its main aims is to prevent borrowers from taking on mortgages that are clearly unaffordable or that have a high risk of becoming unaffordable. However, it also argues that it is not seeking to produce a fundamental change in the market or to reduce creditworthy borrowers’ access to mortgage funds.

The FSA attempted to identify any predictive indicators of financial impairment that could help reduce poor lending decisions. However, it has concluded that there is no simple indicator. While the current mortgage rules require a lender only to “take account” of a borrower’s ability to repay the loan, the new proposals require affordability to be assessed more rigorously. It says that loans should be granted only where there is a reasonable chance of repayment out of income cash flow with no reliance on appreciation of the property value in the future.