The mortgage market in Northern Ireland and the rest of the UK is about to get shaken-up. The Financial Services Authority — which regulates mortgages — has announced new controls designed to prevent unsustainable house price bubbles being repeated.
Part of the blame for the crash in the housing market has been pinned on mortgage lenders. Critics say they loaned too much, both in terms of borrowers’ income and compared to house price values, and did so too easily.
Under the proposals now published by the FSA — which are intended to be introduced gradually next year — lenders will only be able to make loans if borrowers pass stiff affordability tests.
Lenders will need to rigorously assess a borrower’s existing debts and consider whether there is a realistic prospect of repaying their mortgage, given those other debts, their cost of living and their household income.
An end to self-cert
The practice of ‘self-certification’ will come to a complete end. During the boom years, many borrowers declared their incomes without having to prove them. This will not be possible after the FSA’s revised rules are put in place.
Other changes involve stricter controls being imposed on mortgage advisers and brokers.
In future all mortgage advisers will become personally accountable to the FSA. Stricter regulation of brokerage and advice is no surprise — the FSA has taken tough action in recent months against many brokers for failing to trade properly. This included one Northern Ireland mortgage broker, Jack Keay in Londonderry, who was banned.
An additional proposed element of the FSA’s extended regulation is that it would like to see buy-to-let mortgages become subject to FSA control. At present they are regarded as commercial mortgage products and fall outside FSA regulation. But lax lending to buy-to-let landlords has been one factor causing high levels of potential bad debts for some mortgage lenders and consequently has destabilised the wider mortgage market.
Had this wide range of new controls been in place a few years ago, it would have dampened down the mortgage lending market. But over the last year or so, mortgage lenders themselves have already taken similar steps — they had to act more conservatively because of the lack of finance in the market.
Chris Allen, mortgage adviser at Anderson & Macaulay Mortgage Services in Belfast, believes the stronger regulation will have little impact on his firm or the housing market here.
“Self-cert mortgages basically haven’t been in the market for the last year,” he says. “We haven’t done any in that time. Self-cert has gone since the boom went bust.”
Similarly, says Allen, lenders are already taking a tougher line on affordability in order to protect their loans.
“Affordability has been a lot tighter since the recession kicked in,” he says. “Abbey is perhaps now over-conservative. I hope others won’t follow this.” But, he adds, the local mortgage lending market has now resumed, with volumes returning and — he believes — this is likely to continue.
The Council of Mortgage Lenders has broadly welcomed the FSA’s proposals. Michael Coogan, CML director general, says: “We agree with the FSA that regulation in itself cannot resolve the problems of the recent market. However, we also agree that clearly delineated responsibilities, which remove regulatory ambivalence, will help lenders, intermediaries and consumers to know where they stand, and to accept the consequences of their actions.”
But the Building Societies Association believes that regulation is now becoming too intrusive. Paul Broadhead, head of mortgage policy at the BSA, says: “While much of the detail in the paper is sensible, we have significant reservations about the possible unintended consequences of some of the ideas expressed.
“We need a sensible balance between appropriate regulation and allowing people to buy their own home when they can afford to do so. The vast majority of the British population aspire to home ownership and these proposals must not frustrate the sensible ambitions of potential homeowners.
“We are pleased that the FSA is not setting maximum loan to income or loan to value ratios. We welcome the FSA’s recognition that lenders need to focus on borrower’s levels of disposable income. However, while we believe this is a sensible approach, we remain concerned about how the FSA will implement these requirements in practice.”
Broadhead was more sympathetic to the FSA’s hardline approach to self-certification.
“We have always regarded self-certification mortgages as a niche product for a very small group of borrowers, and don’t believe that such mortgages should have reached a market share of anywhere near 45%,” he says. “However, such products are suitable for a minority of people and an outright ban is not appropriate.”
Others are also concerned. Some estate agents have warned that the moves risk choking off the housing market recovery. These fears are most likely to be realised in two niche areas: apartments for the buy-to-let market, which could stall with tough regulation, and for the self-employed, who will have more difficulty in borrowing with an end to self-certification.
But whatever the reservations, change is inevitable. We now need to wait to see its impact.