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FSA Set to Impose New Mortgage Lending Rules

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New rules are set to be introduced in 2013 by the Financial Services Authority (FSA) to prevent a resurgence of the risky mortgage lending which was widely blamed for the financial downturn.  The proposals intend to bring in “common sense” standards that will stop home buyers borrowing more than they can afford – although the current market climate has seen many lenders already implement many of their own restrictions.

The regulator wants to stop a return to the pre-2007 era when lenders seemingly handed out home loans with only cursory checks on the borrowers’ abilities to pay them back.  The most notorious example was the ‘Together’ mortgages offered by Northern Rock, which granted loans worth 125% of the property value – little wonder that Northern Rock became the first bank to be bailed out by the British taxpayer.  Other extreme examples included lenders offering mortgages at seven times the borrower’s income and exaggerated incomes on ‘self-certified mortgages.

Lord Turner, chairman of the FSA said: “While the excesses of the pre-crisis period have largely disappeared from the 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 main thrust to the FSA’s proposals, which are now going out to a further round of public consultation, is that lenders must properly assess the individual borrower’s ability to repay.

In future, when assessing a mortgage application, the regulator wants to force the lender to take the following factors into account:

  • Interest rates will undoubtedly rise from their current low levels
  • House prices are just as likely to fall, as they are to rise
  • Interest-only mortgages are to be advanced only when there is a “believable” source of money to pay off the balance of the loan

Included in the FSA’s proposals is a ‘no lock-out’ clause, to give certain existing home owners the chance of remortgaging.  This applies to existing borrowers who wish to remortgage and may not meet the new affordability requirements; i.e. those on interest-only deals, self-certified and low-deposit mortgages.  The Building Societies Association have welcomed the tweaks to the FSA’s original submission, which was in danger of excluding the self-employed and those in negative equity.  The Council of Mortgage Lenders (CML) also gave the revised proposals its rubber stamp, saying that the proposals struck “broadly the right balance” and they were “workable and appropriate.”