How will the MMR change lending dynamics?

Moreover, first-time buyer activity, for many the bellweather of the sector’s health, is booming in comparison to recent lending penury. The first two months of 2013 were the best for first-time buyer activity since 2008, according to CML. Lending to FTBs was 17 per cent stronger in February this year than in February 2011.

The mortgage market has become accustomed to false dawns since the crisis first emerged, meaning most commentators are cautious about how much should be read into the positive numbers.

Many are also particularly cautious given the looming Mortgage Market Review, which will introduce tough new lending criteria across the sector and require almost all sales to be classified as being fully advised. But what effect will this have on the market?

Putting off buyers?

Peter Griffiths, chairman of the Building Society Association, warns that the ever more one size fits all nature regulation across the financial services sector is likely to prompt changes in product supply and an increase in the application hurdles facing consumers, which could act to constrain lending.

“The unintended consequences of new regulation could see swathes of the UK population far less able to access financial advice [due to the Retail Distribution Review] and finding it much harder to get a mortgage.

“The hoops lenders will have to get consumers to jump through when they apply for a mortgage are getting higher - in fact not just high, but in some instances flaming. A consumer backlash could well follow,” he says.

As mentioned above, the MMR, the final draft of which was published by the Financial Services Authority on October 25 last year, puts in place strict criteria for all lenders and ensures that after 2014 all mortgage sales are advised sales.

Specific features of the MMR lending crackdown include demands that lenders verify income for every mortgage application, consider in detail borrower spending habit, and assess the effect of increasing interest rates on a borrower’s ability to make repayments, as well as a clampdown on the use of interest-only mortgages.

Paul Winter, chief executive of the Ipswich Building Society, opines: “While we agree that stricter criteria should be enforced, we hope that the market does not become over-regulated and that there is a level playing field for lenders regardless of size.”

On the other hand, wider market dynamics are likely to continue to make buying attractive, which should help to hold up activity in the market.

In the past year, the gap between the cost of buying and renting has widened by £21 per month, according to figures from Halifax. At the end of 2011, the monthly costs associated with home buying were 14 per cent lower than renting; in 2012 buying costs increased by 1 per cent, while the cost of renting went up by 4 per cent.

Martin Ellis, housing economist at Halifax, comments: “The sharp decline in home buying costs over the past few years, combined with a significant increase in rents, has greatly improved the financial attractiveness of buying a home. This shift has contributed to the increase in the numbers of house purchases, which reached a five-year high in 2012.

“In spite of this pick-up, home buying levels remains well below the levels at the height of the market.”

Remortgage travails

But the MMR implications extend beyond basic buying trends - and it is not the only factor affecting the market. There are concerns among mortgage professionals that a number of issues acting together could see some borrowers could become ‘trapped’, particularly those that come to remortgage post-2014 and no longer meet the criteria.

David Kenmir, financial services regulatory partner at PricewaterhouseCoopers, explains: “The FSA’s proposals may make it harder for some people to borrow in the future, but the Mortgage Market Review is only one part of the puzzle.

“The aggregated impact of Basel III, the need for banks to deleverage their balance sheets and the ongoing financial economic crisis are likely to have more of an impact on future borrowing and lending.

“These factors will really determine what the mortgage market will look like in three to five years time. As existing initial discount periods expire, the proposals may also make it harder for people to remortgage on equivalent terms.”

Of all the looming remortgaging issues, perhaps the most potentially pernicious is interest-only, which the regulator has estimated could account for £120bn of active loans.

These loans have been increasingly popular in the past few years among new borrowers because of the lower monthly repayment cost. The risk, and concern for the Financial Conduct Authority, is that borrowers are not making sufficient provisions to repay the full amount, relying heavily instead on rising house prices.

Roger Tym, partner at Hogan Lovells Financial Institutions group, explains that the incoming regulation is likely to result in less competition on product type and more on price.

“The FSA’s new mortgage rules are likely to streamline the types of mortgage products offered in the market.

“For example, new stricter affordability tests for interest-only mortgages mean that they are likely to become much rarer and, coupled with the regulator’s increasing focus on product intervention, we’re likely to see reduced choice of types of mortgage products available to customers.

“Instead, the basic price could become even more of a key factor in a customer’s decision when shopping for mortgages,” he says.

Shifting responsibility

In addition, he notes that the new rules could lead to a re-modeling of the mortgage intermediary market.

Mr Tym adds: “In the past, where mortgage brokers carried out affordability checks to assess whether a borrower could meet the mortgage payments, the responsibility for carrying out that assessment lay with the broker, where separately authorised.

“However, under the new rules, the responsibility for ensuring an appropriate assessment of affordability will rest with the lender, even where such an assessment is outsourced to an intermediary.

“As a result lenders will want more control over the activities of their intermediaries, and it’s possible that this may even give rise to a wider re-assessment of the mortgage intermediary market.”

Overall, therefore, it is likely that the MMR will have a significant impact on adviser and lender business practices, but the effects on consumers could go largely unnoticed. The financial crisis has already seen borrowers find it difficult to get a mortgage; that is only now starting to change.

It is more than likely that those refused a mortgage under the MMR regulations will attribute blame to the difficult economic climate. And in some respects, the wider market dynamics could even hold demand up.