You must sit up and take notice of the FSA’s recent proposals, warns Bob Young, managing director of Capital Home Loans
Given what has happened in the recent past in the mortgage market it was inevitable that the FSA was not going to let the current Mortgage Market Review (MMR) pass by simply allowing the regulatory status quo to continue. Indeed, all the sounds coming out of Canary Wharf over the past couple of years should have warned us all that major action was planned. However, the recent consultation paper, ‘MMR: Responsible lending’ still came as a surprise to some even though all its proposals were widely trumpeted beforehand.
What has surprised even more perhaps is the feeling that the FSA had already made up its made long ago on many of the core issues and that little the industry could say or do would prevent it from being steered off this path. And it certainly is a new route for the entire industry, however one that perhaps double backs on itself to the lending environment of yesteryear. It is not quite a return to the time of potential borrowers visiting their bank manager with their best suit on in order to be vetted for a mortgage, however it is a fundamental shift from the recent past with a much more onerous process specifically outlined for what lenders ought to be doing when assessing affordability and the suitability of those who want to take out mortgage finance.
Much of the contents of the paper are widely known and while brokers may find much of it hard to stomach, particularly as it calls into question their future role in the process, there is much of substance here. It will certainly have increased the bafflement levels of most of the public who will not, for example, understand why lenders are not already responsible for assessing a consumer’s ability to pay their mortgage.
To my mind, a number of proposals also fit into the, ‘It’s common sense, isn’t it?’ category. For instance, lenders must assess income into retirement where the mortgage term takes the borrower into such a period. Of course, it is difficult to know, particularly in this day and age, just exactly when an individual will retire. Who knows what the state retirement age will be by then, however this does not stop lenders looking at current arrangements, expected retirement dates, anticipated income, etc and taking a view on this. The expectation may well be that the mortgage will be paid off well before retirement, however it is still possible for the lender, for example, to check on the pension income expected if the mortgage is still outstanding when the borrower moves into retirement. If the income looks like it will not be there then the lender can take a view on reducing the term. To my mind, it is for the lender to do all it can to satisfy itself on the quality of the case and the ability of the borrower to continue to pay the mortgage throughout the full term.
The FSA’s take on interest-only mortgages is particularly interesting for a lender of buy-to-let loans like ourselves. In the paper the FSA is proposing that all loans are assessed on a capital repayment basis, even those that are applying for interest-only products and that the maximum term of such a mortgage should be 25 years. The FSA’s own take on interest-only mortgages appears to be along the lines of ‘get rid’, and while this may be right for a residential mortgage it is certainly not right for buy-to-let. Buy-to-let mortgages need to be interest-only in order for the landlord/borrower to attract tax relief repayment products don’t offer the full value in terms of tax relief therefore in our sector interest-only remains a viable and necessary product. Any change to this re: buy-to-let would have a serious impact on the private rental sector – which at present is the flag-bearer for the Government in terms of meeting housing needs – therefore we would not wish to see any read-across if buy-to-let becomes regulated.
From a personal perspective, a repayment mortgage makes far more sense for borrowers in terms of knowing that the mortgage is being paid off in full through the term and in any society it is surely sensible that people are paying off their debts. The main concern with interest-only is obviously around the lack of repayment vehicles for many borrowers who seem to be relying on house prices increasing and then selling the property at the end of the term to pay off the capital.
The FSA has said in this paper that ‘selling off the property’ is not an adequate repayment ‘vehicle’ and there are a growing number of examples of cases where you can see why this call has been made. A number of years ago, we in the industry talked about an ‘interest-only timebomb’ which would go off at some point and we are just about at that time. We are already seeing many examples of borrowers who took out interest-only products, have come to the end of the term with no repayment vehicle and need to sell their property to pay the mortgage but are finding that the property value is not enough to satisfy this necessity and fund another property to live in.
This is a very real problem and will only increase in the future therefore the need to have a robust repayment vehicle in place is vital. The problem for lenders of course is that they will now need to continually check enough money is being put away to pay off the capital this will require more staff and add more cost. Lenders already seem to be pulling right back on their interest-only mortgage offerings perhaps aware of what may well be coming from the FSA later this year. As with self-cert and non-conforming products the lending fraternity is doing the job itself even before the new rules have been written.
Many brokers reading this will fundamentally disagree with the proposals and my own take on it, however, it seems obvious that the FSA will not be put off its stride by industry sentiment. Which is not to say that you shouldn’t respond to the paper because this is after all a consultation document and is therefore not set in stone while the regulator is being prescriptive in its approach, perhaps some would say too prescriptive in some areas, further feedback from the broker community is vital. However, let us not kid ourselves that we will be left with the status quo once all is said and done given what has happened previously this is not an option and we should all start preparing for a new environment which has more than a hint of the past about it.