Watchdog to back down on mortgages

The Financial Services Authority has been conducting a mortgage market review which threatened to restrict home loans to gold-plated applicants only, turning the clock back nearly half a century.

Irresponsible lenders threw money at borrowers during the last property boom. In those days of easy credit, almost anyone could borrow 125 per cent of the value of a property, and up to seven times earnings.

The ensuing bust triggered the credit crunch and current financial crisis, which threatens to be deeper, longer and more painful than any before it. A furious public demanded we never again see a return to mortgage madness.

So the FSA launched an investigation to ensure such excesses would never become widespread again.

However, its initial proposals threatened to punish not lenders but borrowers, the very ones they should have been protecting. Of particular concern were plans to:

• Ban self-certification mortgages. This would have posed serious difficulties for the self-employed

• Stop interest-only loans

• Introduce stringent affordability tests

• Permit loans on a 25-year term only

• Outlaw 100 per cent loans and make other high-value advances difficult

• Insist that all income declarations be verified, adding to costs for borrowers, and providing extra difficulties for the self-employed and those who rely on overtime and bonuses

• Refuse mortgages to anyone over 40

Initially, the watchdog stood firm in the face of criticism that its plans would cause enormous hardship for millions of borrowers who would be trapped in homes they could not escape from. Repossessions might have surged as interest rates climbed, and borrowers on expensive deals were unable to remortgage.

However, in its recently published business plan for 2011/12, the FSA finally appeared not only to be backtracking, but reproached the mortgage industry for taking the conclusions of its review for granted.

It seemed to signal a return to looking at each applicant individually, saying: "We recognised the need not to take a one-size-fits-all approach and the need to balance the advantages of simplicity against those of flexibility."

This new "flexible" approach has already conceded that interest-only loans should not be banned, and that 25-year terms are not necessarily appropriate in every case. The hope is that easing verification and affordability requirements will permit self-certified loans again in limited circumstances.

The FSA plans to study further the implications for the market changes, and will report early next year, but no onerous changes will be imposed without taking the economic climate and housing market into consideration.

Finally, it warned lenders not to act precipitately, adding: "Lenders should not be seeking to pre-empt any conclusions we reach."

Mortgage lenders have welcomed this more pragmatic approach. Paul Broadhead, head of mortgage policy at the Building Societies Association, said: "We all recognise that excesses and abuses took place during the last bubble, and these need to be stamped out.

"The way to deal with this is through increased supervision, which we are already seeing. The FSA is becoming far more intrusive with businesses, which is a good thing.

"We welcome the signs that the regulator appreciates the need for more flexibility. We were in danger of becoming too process-driven, so that computers decided who got a loan or not based on very narrow criteria.

"We must not lose sight of the fact that electronic processes caused the problems in the first place. Whatever framework we end up with should absolutely allow lenders to engage their brains before deciding whether to lend or not."

There is a further complication coming down the tunnel of mortgage regulation, with the publication on Thursday of a draft EU directive aimed at standardising the mortgage markets throughout Europe.

Mortgage regulation in many European countries is primitive compared with the UK, so these new rules will be less onerous than the FSA's final framework.

The two biggest differences are that the EU wants all European mortgage borrowers to be given information using a standardised form, called a European Standardised Information Sheet, which is different from our Key Features document.

The EU directive also wants borrowers to be given full details when they are turned down for a loan, a proposal which splits the industry.

Mortgage broker Ray Boulger of Charcol said: "It is outrageous the way lenders have been able to hide such valuable information. Borrowers have every right to know why they have been turned down."

Broadhead warns: "The danger is lenders leave themselves vulnerable. If you tell a borrower you have turned them down because they have been at their address for less than a certain amount of time, their next application could give different information."

Otherwise, Boulger believes the EU directive is a complete waste of time. He said: "There is absolutely no point in trying to create a single mortgage market without reforming various other aspects of the property market.

"Some countries have no credit reference agencies at all, or those they do have work in a completely different way. And what about the legal systems? How can you have a single mortgage market without having a single legal framework, something England and Scotland have never achieved after hundreds of years."