MortgagesApr 29 2015

MMR: another kind of crunch?

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MMR: another kind of crunch?

The original motivation behind the mortgage market review was to make sure the practices that contributed to the credit crunch would not be tolerated once liquidity and competition returned to the market.

It is important to remember that the overarching desire was for consumer protection and to create a more stable banking and lending environment. But a year after implementation, has it actually achieved what it set out to do? We look at the hits, the misses and the bits in the middle.

Lenders actually started to change things from when the first MMR discussion paper came out back in 2009. Worried about retrospective action, combined with the significant effects of the credit crunch, lenders quickly pulled out of the self-certification market. While some lenders continued to use fast track in order to continue with a speedy application process, lenders began to audit this process and blackball intermediaries who could not provide proof of income retrospectively.

In fact, post the credit crunch and because funding was a challenge, many lenders used the principles laid down by the consultation papers as an easy way to curtail or fully withdraw from some markets. We saw a market where only those with a 40 per cent deposit and a squeaky clean credit record were in a position to obtain a mortgage. With so little lending taking place as lenders worked to rebuild their balance sheets, most lenders could pick and choose who they wanted to lend to.

Interest-only is one of the areas that has not quite turned out as was originally intended by the FCA. This was another product that lenders clamped down on before the final paper was even published, and I am not sure the FCA intended it to reduce as much as it did.

Interest-only still definitely has a role in the market, especially for high net-worth individuals with means to pay off their mortgage, but now, while interest-only mortgages can still be sold, the borrower has to be able to afford the equivalent mortgage on a capital and repayment basis.

However, this may have had an effect on stabilising house prices; previously people would overstretch themselves by getting a larger mortgage on an interest-only basis. Once this was clamped down on it was no longer possible to buy a house in this way so house prices had to be modified to become affordable.

Affordability requirements are resulting in some people not being able to get their first mortgage until well into their 30s

Lending into retirement has been affected more recently, as we approached full implementation of the MMR, and has been picked up by the consumer press with case studies aplenty.

MMR affordability measures have meant that lenders are finding it hard to justify lending into retirement. This is something that will need to be looked into in more detail in the future as the length of time people can get a mortgage is now being squeezed.

Affordability requirements are resulting in some people not being able to get their first mortgage until well into their 30s, and then the same requirements dictate that you cannot have a mortgage that takes the borrower beyond state retirement age. This could well result in a very different-looking housing market where some people only buy one property in their entire life.

It is also creating a growing number of mortgage prisoners of people in their 50s and early 60s who are unable to remortgage unless they shorten their mortgage term to end when they retire, which in many cases makes any remortgage unaffordable.

The FCA agreed with lenders that they should have transitional arrangements in place for people remortgaging for the same or less money, but few lenders seem to be implementing this. While some lenders implement it for their own borrowers but not those moving from elsewhere, the European Mortgage Credit Directive to be implemented next March will remove even these transitional arrangements

Conversely, affordability into retirement is also starting to affect people just getting onto the housing ladder who require guarantor mortgages. As the same affordability and age requirements apply to a guarantor as to a mortgagee, many younger people are being told that their parents are too old to guarantee their 25-year mortgage, acting as an additional inhibitor to getting on the housing ladder.

As a result, a certain demographic of the UK population who aspire to buy their own home may not now be able to due to a combination of affordability, increasing deposits driven by rising house prices and the lack of a guarantor. These people will be forced to rent for life, which will reduce the number of home owners in the UK.

Another sector to be affected by the MMR is the self-employed. Pre-MMR many lenders had cut back on their underwriting staff and those who were left were largely inexperienced. During the recession lenders were getting enough prime business at low loan-to-value so did not have a need for complex underwriting such as that required to grant self-employed mortgages. Self-employed lending is coming back a little from the specialist lenders, but it remains something that most prime lenders are unable to offer.

One consequence of the MMR is there is much more work for advisers. The complexity of advising on mortgages is reflected in the shift to intermediated mortgages. Post the credit crunch more than 50 per cent of mortgages were sold direct by banks and building societies. Now, post-MMR, more than 65 per cent come through mortgage advisers.

It is now necessary for advisers to do a lot more preliminary work before presenting a case to a lender. Typically, they will need to have gathered enough information to know which lender is likely to take the case and will then send the case fully packaged. Advisers are also doing a lot more of the background checks themselves, such as checking payslips and expenses against a bank statement to ensure that the affordability is up to scratch.

While at first some lenders went a bit overboard with the expenses that they took into account for their affordability calculations, this has been reined back and become a bit more realistic.

While the MMR was implemented in order to protect borrowers and the economy from another credit crunch I fear that it has left many people who could have obtained a mortgage 10 years ago without an opportunity to get on the housing ladder.

It is also disappointing that no sooner have we implemented the MMR than the EU enters with new rules to gold plate it with the Mortgage Credit Directive, which in my opinion is a retrospective step.

While the basic principle of making sure that someone can afford any loan they take out is a sensible one, we need to sanity-check the rules on a regular basis to ensure that we are not changing the housing market in such a way that the asset rich get richer while those at the other end of the spectrum, who could reasonably afford a mortgage, are forced to rent.

David Copland is director of mortgage services of LSL

Key Points

Many lenders used the principles laid down by the MMR consultation papers as an easy way to curtail or fully withdraw from some markets.

MMR affordability measures have meant that lenders are finding it hard to justify lending into retirement.

It is now necessary for advisers to do a lot more preliminary work before presenting a case to a lender.