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‘Toxic’ mortgages banned under FSA proposals

The review’s key features are:

* Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
* Banning "self-cert" mortgages through required verification of borrowers’ income;
* Banning the sale of products which contain certain "toxic combinations" of characteristics that put borrowers at risk;
* Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
* Requiring all mortgage advisers to be personally accountable to the FSA;
* Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home.

Jon Pain, FSA managing director of supervision, said: "The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress. We recognise that we need to bring about a step change in regulation and we need to act now to address the issues we have identified.

"The paper sets out the main findings of the FSA’s comprehensive analysis of the mortgage market. It clearly shows a rapid explosion in mortgage products; the emergence of high-risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end.

"The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms that we have announced will ensure that the mortgage market works better for consumers and that it is sustainable for firms."

The review has also identified that the irresponsible lending practices seen in the market until recently will be curtailed by the FSA’s existing work on capital and liquidity.

The proposals are designed to tackle the problems identified while maintaining a vibrant and sustainable market. But the FSA has not ruled out further change if the initial proposals do not have sufficient effect, including caps on loan-to-value, loan-to-income or debt-to-income.

The discussion paper is out for discussion until 30 January 2010 and the FSA will be actively seeking views from consumer groups and industry. A feedback statement will be published in March. Implementation will be phased, with the focus on speed for areas of high detriment, such as arrears.

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4 thoughts on “‘Toxic’ mortgages banned under FSA proposals

  1. John Stevenson MRICS says:

    What short memories we all have. A lot of the problems that we are faced with is down to the incompetence of the FSA. Now they are doing everything they can to try to deaden an improving but delicate market. The FSA and this Government really are good bedfellows.

  2. Another short sighted, little thought out regulatory blunder which may lead to may millions of self employed people being unable to raise mortgages.

    A few of points to consider

    1. Many self employed people or directors of small family businesses raise money secured by their residential property to expand their businesses, consolidate expensive short term loans and to create working capital for future growth which would all lead to higher net profits. By self certifying their projected income they are able to achieve the increased levels, however without a self certification facility all these people would be rejected.

    2. When a new company begins, the first years accounts are normally prepared about 10 months after the end of the first year (i.e. 22 months after the business starts). Without a self certification mortgage none of these self employed people will qualify for a mortgage for up to 4 years after commencing the business (as many banks require three years net profit), whereas their employees will all be able to apply for a mortgage using just a few months salary slips!

    3. Although the business owner would be the last person to qualify for a mortgage under a regime which bans self certification mortgages as above, he is quite likely to be earning more than his staff and in the event that the business fails he will always be the LAST person to lose his job.

    4. Since the 1980s a substantial number of people have started businesses and bought or raised money secured by property using self certification mortgages creating and redistributing enormous capital wealth throughout the UK economy. Do we really want to penalise the small business owning entrepreneurs who have contributed so valuably to this open free market economy where effort, hard work and some speculation can achieve success for everyone. Do we want to revert to the bank underwriting practices of the 1970s and before when we were predominately a nation of employee tenants who had little interest adding value to their jobs or their homes as that value was rarely shared with them

  3. Steven Lees says:

    “The FSA’s review is an indication of the major reforms required in the mortgage market to avoid the potential for a return to the turmoil of the past two years.

    “However, while all the recommendations are extremely valid, I have to agree with today’s comments from the CML – that the review contrasts with current political pressure to increase the flow of lending. Eradicating irresponsible lending is clearly vital for the long-term, but the continued extreme lack of mortgages is still the main hindrance for recovery, with credit-worthy borrowers prevented from entering the market.

    “As signs of tentative improvement start to emerge across the housing industry, the review is a timely reminder of the lessons that must be learned for us to reach a sustainable market that works for both consumers and financial institutions. However, it is important that the proposed restrictions do not hide the fact that the mortgage market remains effectively closed to the majority of would-be homebuyers.”

  4. Peter L. Griffiths says:

    Most of the toxic assets in the world’s banks were Mortgage Backed Securities issued by Fannie Mae. These holdings will presumably be prohibited by this decision of the FSA, but what about credit default swaps and the International Swaps and Derivatives Association, are these still to destabilise the financial system?

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