How the mortgage market might look in 2013
The long awaited Mortgage Market Review has been generally welcomed by the mortgage industry. Joanne Atkin reports on the main proposals and some of the reactions
The Financial Services Authority has listened to the mortgage industry, said the Council of Mortgage Lenders, following the unpopular and flawed initial version of the Mortgage Market Review. The revised package of proposed reforms are a far more workable and appropriate set of measures and are broadly supported by both lenders and intermediaries.
Affordability has been placed at the heart of the proposals with an emphasis on good mortgage underwriting. There are three key proposals.
Firstly, lenders must assess affordability; it is not the job of a mortgage broker to do this. Intermediaries just need to find out whether the consumer meets the lender's expected eligibility criteria. Mortgages and loans should only be advanced where there is a “reasonable expectation” that the customer can repay without relying on rises in house prices.
Secondly, the affordability assessment will take into account future interest rate rises. Borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.
Thirdly, interest-only mortgages should be assessed on a repayment basis unless there is a credible plan to repay the capital; relying on hopes of rising property values is not enough.
Comment
Lord Adair Turner, chairman of the FSA, said: "We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.
"The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be - how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.”
Lord Turner said the FSA is keen that lenders provide a detailed assessment of the likely impact of these proposed rules then the regulator will be able to make appropriate final decisions.
The consultation is open until March 30, 2012 and the FSA board will make a decision on the final rules in summer 2012, but implementation will not be before 2013. The FSA believes it is important to have the rules well established long before any future upturns in the economy.
CML director general Paul Smee commented: "Lending needs to be responsible and done in a way which protects consumers. Rules need to be practical and avoid unintended consequences. Whilst there is much detail to be pored over, the FSA's new proposals seem to strike broadly the right balance. If lenders are to make their contribution to improving the supply of housing and to the wider agenda for economic growth, then they need a regulatory framework which also supports that objective.”
Paul Broadhead, head of mortgage policy at the Building Societies Association, said: "The devil is always in the detail but these proposals seem to represent a welcome shift in policy by the FSA.
"No-one is looking for a regime that permits lax lending practices, however, the original proposals were in danger of locking credit worthy borrowers out of the market or imprisoning those with immaculate payment records, but non-standard profiles, in their current homes and loans. This seems to have been avoided which is good news for the self-employed, those in existing self certified mortgages and people with negative equity.
"The new regulations appear to have struck a reasonable balance between allowing lenders flexibility when assessing affordability, whilst maintaining a sensible level of consumer protection.”
Key proposals
One of the main proposals is that income will have to be verified in every mortgage application and lenders must be able to demonstrate that the mortgage is affordable. Lenders do not have to consider everything that borrowers spend but cannot ignore unavoidable bills, such as heating and council tax. Lenders will also have to look at the impact of increases in interest rates in line with current market expectations.
Applicants that are trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs.
Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.
The FSA is also calling for feedback on developing a specific approach for entrepreneurs who borrow against their home to fund their business.
Robert Sinclair, director of the Association of Mortgage Intermediaries, commented: “The need to evidence income and assess committed and essential expenditure will deliver sustainable loans, together with new protections for those who are credit impaired.”
But Charles Haresnape, managing director of Aldermore Residential Mortgages, wondered why intermediaries are no longer required to assess affordability in order to give advice.
Grenville Turner, chief executive of Countrywide, said: “One of the most positive changes is that these proposed measures provide the much-needed clarification on the grey area surrounding where responsibility for measuring affordability ultimately lies. The lender assuming responsibility for ensuring the affordability of the loan removes any confusion, providing clear and adequate protection for consumers.”
He continued: “Where the proposals fall short, by the FSA’s own admissions, is that one in 40 of new customers that would currently be eligible for a mortgage could potentially struggle to get a mortgage if the proposals were introduced in this market. In an environment where lenders are already being extremely cautious with their lending criteria; by placing all affordability assessments at the doors of lenders’ risk teams this could create an even stricter lending environment.
"To ensure that these measures do not stagnate the market further, lenders will need to become more flexible with the affordability assessment criteria for new borrowers including a workable replacement for the self-employed and homeowners stuck in negative equity.
“Under the proposals, self-certified mortgages are a thing of the past due to the requirement for every mortgage to be income verified. However, lenders now have an opportunity to adapt their verification procedures to ensure that self-employed customers, who traditionally used self-certified products are not left out in the cold. One of the measures that can be considered is assessing the spending patterns of the applicant rather than entirely focusing on income levels.”
Interest-only
Lenders must assess affordability on a capital and interest basis if an interest-only mortgage is to be granted, unless there is a clearly understood and believable alternative source of capital repayment. Lenders cannot accept speculative repayment strategies, such as reliance on increased property prices.
Jane Manning, head of compliance at Crown Mortgage Management welcomes this proposal and said: “Until recent years, if a borrower required an interest-only mortgage, lenders required assignment of a plausible repayment vehicle or there had to be sufficient equity in their property, at the outset, for downsizing at retirement to be a realistic option. The proposed reforms are not new but instead revert to procedures followed by lenders ten years ago.
“Crown is witnessing first-hand the impact on borrowers who took out interest-only loans without a suitable repayment vehicle or strategy in place. Some of these borrowers are reaching the end of their mortgage term and for many, there is no alternative to the loss of their home as they are unable to repay the mortgage and, due to their age and reduction in income following retirement, are unable to arrange further borrowing.”
Other lending
If the mortgage term is to go past the borrower’s state pension age, lenders must adopt “a prudent and proportionate approach to assessing income”.
With debt consolidation for credit impaired consumers lenders will be required to either assume that the debts will remain outstanding by including them as “committed expenditure” or repay the debts directly to the creditor.
In transitional arrangements, such as remortgaging, lenders can waive the affordability rules when entering a new mortgage contract - providing the borrower has a good repayment history. These arrangements do not compel the lender to lend, ultimately that is a commercial decision for the firm.
Advice
Every seller - intermediary or lender - must hold a relevant mortgage qualification but Grenville Turner was disappointed that the FSA has stopped short of making clear its intentions on individual registration.
He explained: “At Countrywide, we firmly believe that this would cement the foundations for a level playing field for professional standards in the mortgage industry as well as assist in fraud prevention measures. We would urge the FSA to reconsider this during the consultation process, as necessary qualifications combined with individual registration raises industry standards and professionalism.”
Non-advised mortgage sales will no longer be allowed. All mortgage sales which involve spoken or other interactive dialogue with the consumer must be advised. The exception is where consumers are knowledgeable, such as high net worth individuals, and professionals. These people will be able to opt-out of receiving advice and can take out a mortgage on an execution-only basis.
Vulnerable consumers, which the FSA classes as equity release, sale and rent back, right to buy and those who are consolidating debt, will not be allowed to opt-out of advice. However, with the exception of sale and rent back consumers, they can reject the advice and purchase on an execution-only basis.
Where there is no spoken or other interactive dialogue in the sale, for example, purely online and postal sales, consumers will be able to get a mortgage on an execution-only basis, except those categorised as vulnerable.
Robert Sinclair commented: “Making mortgage advice a requirement for all interactive sales unless the customer rejects the offer of advice will provide significant benefits for consumers. The MMR’s proposals will ensure many more consumers are given the support and guidance they need to make better and more informed decisions.”
Grenville Turner said: “The FSA has responded to customers’ needs and simplified this process by scrapping the non-advised process favoured by most banks and have proposed measures to allow the majority of customers to receive the right advice based on their circumstances from qualified advisors, whether by telephone, online, in a bank branch or with a mortgage broker.”
Andy Caton, corporate development director at Yorkshire Building Society, commented: "The move to require some borrowers to undertake an advised process appears to be a positive one, however we would like to see clarity on the definition of 'vulnerable' and 'high net worth' customers. It is also important that individuals are able to select an execution only service, whichever channel they choose to use.”
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, has questions around the boundaries of some of the issues and asks: “What is reasonable, who should be included and who might be defined as vulnerable?
"We also note that the proposals will have a rolling impact as the market strengthens. In that regard, I see the proposals as modestly reducing who can get mortgages now and when the market picks up these belts tighten further. It is clear this will impact most heavily on non-prime with a major contraction of what that market might do if the market overall becomes more buoyant.”
Consumer information
In order to reduce information overload for consumers, the FSA has reduced its prescribed disclosure requirement for firms. The Initial Disclosure Document (IDD) is to be replaced by firms disclosing ‘key messages' to the consumer at the right time and in a way that they are most likely to be receptive to.
Independent firms will no longer be required to offer their customers a ‘fee only' option. They must disclose to customers whether they are sourcing direct-only deals. If intermediaries want to recommend a direct-only deal, the FSA wants to remove the requirement to provide a Key Facts Illustration, thus making it easier for the intermediary.
Firms must consider whether rolling fees into a loan is appropriate and if consumers want to do this they must positively elect to do so.
Arrears and repossessions
The FSA has strengthened its existing rules on arrears charges to address areas of poor practice found in arrears handling. For example, changing guidance in rules on administration costs, or limiting the number of payments lenders can collect to two direct debits a month.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said: “Although the proposals might suggest fewer arrears and repossession cases going forward, it does seem that options for those in difficulty will narrow and this might change the balance between arrears and repossession cases as we move into a downturn."
Non deposit taking lenders
The FSA is to introduce capital requirements for non deposit taking lenders to reflect the risks in non-bank lending. Non-bank lenders must adopt a more risk-based regime, the quality of capital is to be increased, and firms will have to put in place systems and controls to manage their liquidity risk effectively.
Niche markets
Niche sectors consist of equity release (lifetime mortgages and home reversion plans), home purchase plans, sale and rent back, bridging finance, high net worth lending and business lending. The FSA wants to achieve the same broad outcomes for niche consumers as for conventional mortgage consumers so is proposing a straight ‘read across' of the majority of its proposals, affordability checks, income verification, and so on.
Ideas dropped
After consultation with the industry some of the proposals made in the previous MMR will not go ahead.
This includes assessing affordability over a maximum 25 year term and requiring firms to apply an affordability buffer for credit-impaired consumers.
Plans to replace the scope of service labels with the RDR approach of ‘independent' and ‘restricted' have been dropped.
There will be no need to provide two KFIs where the borrower is considering rolling fees into the loan and sellers will not have to assess if it is appropriate for the loan to extend into retirement.
Timing and Europe
Andrew Baddeley-Chappell, head of mortgage strategy and development at Nationwide Building Society, welcomed the review but questioned its timing.
He said: “The current mortgage market is fragile and growth is relatively weak. With this in mind, we question whether now is the right time to ask the industry to divert its focus onto further regulatory changes. Even more regulation, expected from the EU, is likely to result in further changes to the regulatory framework. It would be far better for the UK and European regulation to happen at the same time.
“Over the last few months, lenders such as Nationwide have developed innovative solutions to help first-time buyers such as Save to Buy, and to support government and industry initiatives such as FirstBuy and the New Build Indemnity Scheme. Analysing, interpreting and implementing new regulation will divert lenders’ attention away from activities helping to stimulate the mortgage and housing market.”
Paul Smee concluded: "We look forward to working with the regulator to iron out any remaining wrinkles and to move towards a smooth process for implementation. Ideally, this would take account of the European legislative proposals too, so that as far as possible the costs of regulatory duplication are avoided."
