Mortgage shakeup will put squeeze on buyers

Published on Saturday 17 October 2009 13:49

BORROWERS should this weekend brace themselves for a radical shakeup in the mortgage market which could prevent thousands of consumers buying a home or moving to a cheaper deal.

A housing boom and delinquent mortgage market are blamed as serious triggers of our current financial crisis, which last week saw unemployment rise to 2.47 million.

Watchdogs at the Financial Services Authority are poised to announce, as early as tomorrow, a radical shakeup of the mortgage market, which they hope will prevent such a catastrophe striking again. But loans will be much harder to come by, and potentially more expensive.

However, experts warn that precipitate action could choke off any fragile recovery in the housing market. Council of Mortgage Lenders director general Michael Coogan said: "Today's problem is the lack of available mortgage finance. Regulatory intervention is unlikely to reverse this trend and may accentuate the problem."

Self-certified mortgages, sometimes branded "liar loans", where a borrower's income is taken at their word, will effectively be banned, hitting hard the self-employed and those with fluctuating earnings, as well as those who were "imaginative" about their income in a desperate bid to join the house price party during the boom.

Sub-prime home loans which allowed those with a bad credit history to buy a home, and which have all but disappeared anyway, will remain a thing of the past, making any financial indiscretion a disaster from which you may never escape.

Ridiculously high income multiples, which saw borrowers easily qualify for loans of up to seven times their earnings, well in excess of the traditional three or four times ratio, will also disappear. The watchdog had considered imposing strict caps on income multiples. It opted instead for a prescribed affordability test, still based on an element of income multiples but looking closely at all forms of expenditure as well as earnings.

An industry insider said: "On this basis, it is unlikely borrowers could ever expect an advance of more than five times earnings, as an absolute maximum."

The watchdog will also discuss whether compulsory deposits of a predetermined size should be required to qualify for a mortgage, by placing a cap on loans to values, which would see 100 per cent deals banned. However, this appears to have fallen by the wayside in favour of greater reliance on a strict affordability regime.

And buyers can expect to be locked in a room with a branch manager and read the riot act before the loan is agreed, with banks acquiring new responsibilities for ensuring that borrowers understand the risks they are taking on.

Buy-to-let borrowers, or those looking for finance to purchase a second home, will for the first time be subject to the same rules, making such acquisitions far more difficult and expensive.

If it all looks a touch too draconian, it is worth remembering that the EU is in the middle of drawing up a new mortgage directive which could be even more punitive, given the conservative nature of most European mortgage markets.

Nevertheless, the FSA's proposals will bring major headaches for potentially millions who took out self-cert or sub-prime mortgages in the boom years, and who will now find it impossible to remortgage.

The regulator is expected to demand high levels of evidence from all borrowers of their income before an advance is agreed. This will mean salary checks at firms for those who have a job, and at least three years of audited accounts for the self-employed.

Many currently on self-cert arrangements will not be able to provide sufficient evidence to support their current loans, particularly given the impact the recession has had on salaries and the income of small businesses. If their current mortgage becomes hideously uncompetitive and expensive, they will not be able to move to a cheaper lender.

Ray Boulger, mortgage broker at Charcol, warns: "Interest rates are low right now and are predicted to stay low. But one day they will rise again, and borrowers who relied on self-cert or sub-prime loans will be stuck on their lender's variable rate.

"Some of these lenders are no longer granting new loans, so they offer borrowers no cheaper alternatives which might help them to stay afloat financially. Others require higher equity in the property before allowing them to switch to a fixed deal. These borrowers will be trapped, facing escalating monthly bills."

But ordinary borrowers will also be hard hit. As the housing bubble inflated, lenders effectively stopped carrying out almost any income checks. As banks and building societies raced for business, they increasingly took borrowers at their word through a process known as "Fast Track". That too looks set to bite the dust, because the FSA is intent on verifying income details on every application. This will slow down the whole process and potentially push up costs further.

A market observer said: "We understand the need for more verification, but we would rather do it on a 'layered' risk basis. If you have a first-time buyer looking to borrow 500,000 to purchase a 525,000 house this is a high risk, and we agree it needs to be checked out carefully.

"But we don't see the need to verify the income of another customer, with a long track record of meeting mortgage repayments, who wants to borrow 60,000 to buy that same house.

"We don't believe the evidence is there, which suggests the majority who commit 'soft fraud', that is they exaggerate their income, don't ever default on their loan. We need to concentrate on the highest risks. The bottom line is, checking all incomes not only slows everything down but will incur big new costs, which will have to be passed on to the customer."

The self-employed and those with casual or fluctuating earnings will find it increasingly difficult to get a loan. Historically, such obstacles were a major disincentive to starting a business or going it alone, and it looks like the clock is about to be turned back.

But Boulger is confident that accountants will come up with tricks which will help their clients continue to qualify for an advance.

He said: "Audited accounts can make income look lower than it is because the taxpayer is claiming a range of allowable business expenses, such as the cost of running a car, which he would do anyway. However, it is possible to add these numbers back in when applying for a mortgage."

The lending industry is nervous about the impact of a new stricter mortgage regime.

Building Societies Association spokesman Neil Johnson said: "It is important lenders insure that borrowers can afford to repay the loans they are taking out, and if the FSA's review helps that, this will be a good thing.

"But we hope the regulators recognise the needs of the market and the desire of customers for innovative products which help them secure a home, and it would be a shame to kill off this activity."

CML's Coogan added: "The FSA faces a number of challenges and potential pitfalls in progressing its review too quickly. Perhaps the biggest of all is to resist external pressure to implement measures at a time when the mortgage market is still not functioning effectively.

"The current problems stem not from a failure of the mortgage rulebook, or from widespread credit problems in a recession, but essentially from past approaches to supervision of the rules and an oversupply of money to lend out."