The FSA (Financial Services Authority) is proposing to introduce new rules for mortgage providers in particular banning self certification of income loans. They have published a discussion paper that outlines plans for a much more hands-on style of regulation and far tougher mortgage rules. It wants to ban self-certified mortgages and impose far heavier credit checks on people applying for mortgages.
What the FSA is suggesting:
It wants an end to self-cert mortgages that allow borrowers to declare their income. It also wants to make lenders more responsible for their customers’ ability to pay back borrowing, demanding greater affordability tests for mortgages.
Lenders would have to carefully examine applicants’ spending habits, perhaps even check bank statements, to be confident that they have enough disposable income to repay the loan. It intends to prevent firms from profiting off struggling consumers by hitting them with arrears charges.
The FSA also wants to outlaw toxic borrowing, for example, lending high loan-to-value loans to borrowers without a steady income and with a problematic credit history.
Why has it made these proposals? The last 18 months have seen many people suffering great financial distress, the FSA claimed.
Prior to the crunch, there was massive growth in the mortgage market, with many banks following high-risk lending strategies and relaxing their credit criteria.
Jon Pain, managing director of supervision at the regulator, explained:
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 today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.
Will I be able to get a mortgage?
Once the new rules are brought in, some people will struggle to get a mortgage where previously they could have. There is some concern that the self-employed will struggle to gain mortgages without self-cert opportunities. However, the FSA insists that people who can afford mortgage repayments will still be able to borrow, they will just have to prove their earnings to lenders.
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