Mortgage crackdown: For our protection?
Securing a mortgage is about to become much harder - especially for those seeking self-cert mortgages, first-time buyers and buy-to-let investors.
After getting tougher and more 'interventionist' with the banks, now the Financial Services Authority (FSA) has turned its attentions to the consumer.
New proposals announced this week see a range of targets with the aim of creating a mortgage market with long-term stability - away from booms and crashes in the property market.
In proposals for a reform, the FSA makes its position on the consumer ominously clear: "Our policy approach to date has been underpinned by a view that mortgage consumers will act rationally to protect their own interests.
"We believe that we need to change that approach, recognise the behavioural biases of consumers and be more interventionist to help protect consumers from themselves," the regulator says in the report.
So what is the FSA suggesting, and will it stifle our home-owning dreams or protect us from the urge to over-extend ourselves (and then blame the banks for letting it happen)?
Affordability
First off, the FSA is not proposing a straightforward upper limit on the loan-to-value offered by mortgage lenders. This was a worry for lenders and consumers, as it would cut out many people who would take years to raise a large deposit, but who could easily afford the monthly cost of the mortgage.
This is partly because there is no need to jump in with a cap - at the moment, the higher the loan-to-value offered, the more the lender has to put by in capital to act as a buffer against losses, and the less it has to offer in new loans - so it would seem the days of 100 per cent mortgages are essentially over.
Instead, and this has received a cautious welcome from those in the industry so far, the FSA is proposing an 'affordability test'.
Consumers seeking a mortgage would list their income and outgoings, with the lender deciding if there is enough room in the budget for the mortgage payments.
Most mortgage lenders already have a version of this and part of checking your credit score is to find out whether you already have monthly commitments on existing loans on top of day-to-day bills.
But the FSA is proposing a very specific breakdown of outgoings, from council tax and school fees right down to how much you spend every month on shoes, alcohol and cigarettes.
"Affordability is the right criteria," says Ray Boulger, senior technical manager for mortgage broker John Charcol.
"Proving that someone can afford the mortgage is more important than if they have borrowed 100 per cent of the house value.
"Of course, the higher you borrow, the less room for manoeuvre you have if something happens - but I would go as far to say that someone who can comfortably afford a 100 per cent mortgage will sleep better at night than someone who is stretched to afford a mortgage at 25 per cent."
However, making customers write a detailed breakdown of all their outgoings will have "limited value" Mr Boulger warns.
First of all, when people estimate their spending there is always a huge gap between what they think they spend and what they actually spend, he points out.
But there is another important point that the report overlooks, he says.
"When people decide they want to buy a property, they may find on paper they can't afford it - but what they will say is they will cut down on going out, they will cut their expenditure so they can afford a house.
"While this exercise may have some use for first-time buyers, for more sophisticated buyers this has limited value - in fact it's quite insulting."
Consumers are certainly going to have to jump through more hoops to secure their mortgage, but it seems unlikely lenders are going to demand your grocery receipts to check you are really are spending as much as you say.
However, the extra rules will make it harder for first-time buyers - the group that supports the housing market the most - to get on the ladder at all.
Consumer group Citizens Advice believes this is not necessarily a bad thing.
"Undoubtedly it will make it harder for some first time buyers to get on the ladder, but it should also mean those who do are less likely to struggle to keep up repayments and stay in their homes," a spokesperson says.
"But it also means that people will need reasonable alternatives and why we have been calling for a better deal for private tenants."
Which? also believes home ownership is not for everyone, but the alternatives must be improved.
"The private renting sector has to improve for tenants and also the options for saving for retirement - and that's up to the government," says Vera Cotrell, principal policy adviser for Which?.
In the past, consumers have focused too much on house price rises as an investment strategy, to help fund their retirement and to release equity for spending.
Which? says it would like to see the FSA go further, banning 100 per cent mortgages to protect consumers from becoming over-indebted.
In fact, consumers were getting too far into debt at least in part because they assumed the banks knew better, according to Antony Elliott, the director of charity Fair Banking.
"If banks were saying we will lend you a certain figure, the customer thought they were fine to borrow up to that figure," he says.
Assuming the bank would not lend if there was a danger in taking on so much debt, consumers were putting themselves at risk without realising, Mr Elliott believes.
Making the banks take more responsibility for the mortgages that their customers are taking on is to be encouraged, he says.
And a process that helps consumers think carefully about whether they can afford a mortgage - especially if interest rates rise - should be welcomed.
"But this is an area where we should be cautious that it doesn't become just a tickbox exercise. It should be useful not just for the bank but for the individual," Mr Elliot warns.
Ms Cotrell disagrees.
"Banks have always had to check affordability - but in the past may have just done it as a tickbox exercise - the new proposals will be much more stringent."
Major banks already ask for bank statements to check income and outgoings, so the proposals will just ensure all lenders take the same approach, Ms Cotrell says.
But there are other areas of the report that have raised more serious concerns.
Self-cert
"The main thing that I've seen that is worrying is the banning of self-cert mortgages," says Mr Boulger.
The FSA is proposing self cert mortgages go altogether - after the niche product aimed at the self-employed with irregular incomes become more widely used and abused.
There is debate over how many people this could affect. While the Council of Mortgage Lenders (CML) maintains self-cert products accounted for only 15 per cent of the overall home loan market in 2007, the FSA believes 45 per cent of mortgages were advanced without the lender checking income.
While there certainly have been problems with banks and brokers failing to verify the income of some of their customers, bringing in a blanket ban will be bad for consumers, Mr Boulger believes.
The problem is the lumping together of fast-track and self-cert mortgages, Mr Boulger says, which under the FSA's proposals will both be banned.
Although neither of these mortgages requires proof of income, with fast-track mortgages lenders reserve the right to ask for proof of income if they choose.
This is important as many self-employed people may not have the time to get their accounts in order and signed off by an accountant before getting their mortgage - by this time, the sale may have fallen through.
In this case, it makes sense to get the funding in place first, which the bank can always reserve the right to withdraw if the customer is found to have lied on their application.
Banning self-cert also means anyone who has a problem in proving their income will now struggle to get a mortgage, while those who are already on a self-cert mortgage will find it impossible to remortgage and will remain trapped in their properties.
In fact, many lenders have seen the writing on the wall and have already withdrawn their self-cert mortgages, but with the publication of the FSA's proposals, the remaining products may also disappear from the market.
A spokesperson for Beacon Homeloans, one of the last self-cert mortgage providers, says the company is still "digesting" the report and has not yet made a decision on whether to continue offering the product.
However, the spokesperson adds: "The withdrawal of such a product would put at a disadvantage some self employed and freelance consumers that this very product was made for in the first place."
Which? maintains this should not be a problem, as consumers should be able to prove their income with tax returns or pay slips showing commission, and if lenders refuse to accept these proofs consumers would have a case to take to the Financial Ombudsman.
Buy-to-let
The FSA is also pushing to take over the regulation of buy-to-let mortgages.
Originally, buy-to-let mortgages were not covered by the FSA, as landlords were not seen as consumers but businesses that should have a greater sense of risk and the dangers they are getting into.
As such consumer protection was not needed.
However, the explosion of buy-to-let - and collapse in availability of mortgages - has shown many consumers were buying properties to rent out and were not aware, or being warned, about the dangers.
It is possible the old policy of looking at rental incomes to cover a percentage of mortgage repayments may be dropped. Instead landlords' general affordability could come into play.
John Luke Busby of Athena Mortgages, which specialises in French mortgages, claims the biggest losers could be smaller landlords, as professionals could be able to continue.
"The biggest change will affect buy-to-let borrowers," Mr Busby says.
"In the UK landlords could put 15 per cent deposits down and just work off rents to cover repayments - not looking at the income situation."
He adds the changes seem close to mortgage system in France, where greater deposits are needed and banks have a closer relationship with customers in judging their affordability.
David Salusbury, chairman of the National Landlords Association, NLA, explains the FSA may face problems over defining a buy-to-let landlord.
"As with all proposals, the devil will be in the detail.
"When does a so-called 'amateur landlord' become a professional landlord? How large does a property portfolio need to become? The answers to these questions may well indicate exactly which investors are in need of further protection and which are capable of protecting their own interests quite adequately."
He adds the focus of reforms should be "about getting lenders lending once more".
"The lack of mortgage finance is hampering the housing recovery and, therefore, reducing the available housing stock on offer to those who choose to rent."
Mr Elliott at Fair Banking is concerned that the proposals handed down by the FSA are simply "shutting the barn door once the horse has bolted", and although he has his doubts about the wisdom of some of the self-cert mortgages popular before the credit crunch, is not convinced a total ban is the right route.
"What the regulator should be asking is, is it good for the consumer or just good for the bank?"
Despite the government pushing the banks to lend to consumers and businesses, the extra costs and red tape that tightened regulations bring may stifle innovation for years to come and restrict choice.
This gives an idea of how the relationship between lenders and borrowers is going to develop.
With a greater emphasis on affordability tests and the consumer's past conduct with credit, getting a mortgage with the bank you have had the longest relationship with in terms of savings, credit cards and other loans will seem the easiest option, stifling the competition that makes for an efficient mortgage market.
Moreover, workers who have difficulty in proving their salary may be the ones that have the most to lose here and although the FSA believes this group should still be able to get mortgages, the concern is that banks will simply not do business with those considered too much of a risk.
But the biggest problem stricter regulation could cause is for first time buyers, who are already struggling against high house prices and a lack of mortgage availability.
First time buyers drive the housing market and if this group is forced to put off home ownership, house prices may not recover for a generation.
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