Business

Regulator and lenders in mortgage lending row

An estate agent's window

Mortgage lenders have called on the UK financial regulator to water down its plans to restrict mortgage lending.

The Council of Mortgage Lenders (CML) says the plans of the Financial Services Authority (FSA) are "flawed and impractical".

But the FSA said it was simply trying to drive out irresponsible lending.

It said borrowers needed to be protected from taking home loans they could not afford, which exposed them to being repossessed.

'Negative, unintended outcomes'

The row between the two organisations has been brewing since the autumn of 2009 when the FSA first proposed that self-certified lending should be banned.

Since July this year, the FSA has been consulting on a wider range of plans, which the CML is worried will severely, and unnecessarily, hinder any upturn in mortgage lending in the future.

The CML's director general Michael Coogan said he wanted the FSA to rewrite its draft rules.

Research commissioned by the CML showed "a wide range of evidence that suggests there would be a range of negative, unintended outcomes from the implementation of the FSA's policy and proposed rules as currently drafted," he said.

The FSA responded by accusing the mortgage lending industry in the past of being guilty of "major failures" including "risky lending" that had led to "unaffordable borrowing", particularly in the years leading up to the start of the credit crunch in 2007.

'No money left'

Among the FSA's plans are that lenders should have to:

  • verify the income of all borrowers
  • assess an applicant's income and expenditure
  • assess their ability to repay on a full capital-and-interest basis
  • assume loans are for no longer than 25 years
  • restrict the size of loans to people with past payment problems, and
  • assume that interest rates might rise from their initial level.

The CML recently complained that these measures would have slashed past mortgage lending to many sound borrowers, and would lead to falling house prices if implemented in the future.

But the FSA said that many borrowers were only being kept afloat by ultra-low interest rates.

It pointed out that 350,000 borrowers are currently in arrears and 54,000 homes were repossessed last year.

Although that was a much better position than many commentators had expected, the FSA argued that things could take a turn for the worse.

"Almost half of UK households (46%) have had little or no money left after their mortgage and other bills were deducted from their income," the FSA said.

"Even a modest rise in interest rates could lead to a significant increase in the number of families suffering financial distress.

"This is why it is imperative that we ensure lenders act responsibly and do not return to irresponsible practices, in order to protect consumers from taking on mortgages they cannot afford and potentially losing their homes," the FSA added.

Uncertain

The CML argued that the government appeared uncertain about whether or not it wanted to protect a vulnerable minority of borrowers, or to help many other people achieve their aim of home ownership.

It said both could be achieved by a freer mortgage market and a safety net for distressed borrowers.

But the FSA countered that its plans merely amounted to telling the industry it should apply "sensible underwriting" when granting loans, of the sort that many lenders were currently applying anyway during the current bout of mortgage rationing.

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