"There is a risk that the FSA’s proposals will prevent some credit-worthy customers getting a mortgage and create mortgage prisoners. To ensure borrowers are not adversely affected, it will be important that when the rules are implemented they provide clarity for lenders and are enforced consistently across the market.”
Some of the key proposals include:
•Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
•Requiring verification of borrowers’ income in every case to prevent over inflation of income and to prevent mortgage fraud;
•Extra protection for vulnerable customers with a credit-impaired history.
The tough new proposals, published in the consultation paper, form part of a major review by the FSA into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.
“Interest only mortgages are not inherently bad or high risk. However, it is important that borrowers with interest only mortgages understand the importance of having a plan in place to repay their mortgage at the end of its term. The FSA needs to proceed with caution so as not to restrict the use of interest only as a way of helping borrowers overcome repayment difficulties".
The FSA found that:
•46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
•Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
•The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
•Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
•Borrowers with a credit-impaired history are particularly vulnerable.
Broadhead also called for the FSA to ensure there is a greater balance between responsible lending and responsible borrowing, saying:
“Borrowers must be empowered to take ownership of their choices and decisions. Well informed decisions are more likely to deliver consumer benefit. Placing all the responsibility and burden on lenders only weakens the position of consumers in the long term and should be avoided.”
Lesley Titcomb, FSA director responsible for the mortgage market, said: “There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.
“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”
The report also includes the key findings from the FSA’s review into arrears charges, which indicated significant variation in the level of arrears fees across the market.
The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears. The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.
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