Wednesday, October 21, 2009

Business Times: Britain bans 'liar loans', tightens mortgage rules

October 20, 2009
Britain bans 'liar loans', tightens mortgage rules
Regulator says that it will also impose affordability tests for all mortgages

(LONDON) Britain's financial regulator plans to force mortgage lenders to check the income of all borrowers, scrapping so-called 'liar loans' blamed for helping to fuel bad debt problems at the heart of the credit crunch.

In the first draft of plans to overhaul the UK mortgage market, the Financial Services Authority (FSA) yesterday said that it would also impose affordability tests for all mortgages, but stopped short of capping loan value to property price ratios that could have effectively banned 100 or 125 per cent mortgages.

The initial findings of the long-awaited review - which reflects the increasingly hands-on approach of a regulator widely criticised in the aftermath of the credit crunch - also called for the FSA's scope to extend to buy-to-let mortgages.

'There are clearly certain types of loans which should not be made, and there are clearly some consumers who should not place themselves in a position where they wouldn't be able to repay that mortgage in the future,' FSA CEO Hector Sants said.

Mr Sants told BBC radio that risk was useful to innovation, but warned that the mortgage market had simply become too complex.

'Back in 2007, there were something like 10,000 different mortgage products available, something like 3,000 or so products available in the sub-prime area. I think that's a level of complexity we could well do without,' he said.

Residential mortgage debt in the UK, which soared in the boom years, now amounts to around £pounds;1.23 trillion (S$2.8 trillion), according to the FSA, and accounts for approximately 70 per cent of all credit extended by lenders in the UK.

Changes to mortgage regulation are a key plank of reforms which the FSA and the government hope will avoid a repeat of the unbridled boom in household debt in the run-up to the crisis.

'We . . . call on the industry to start making changes immediately. They don't have to wait for final rules to adopt fair and responsible lending practices,' Financial Services Secretary to the UK Treasury Paul Myners said.

Criticised for failing to prevent the debt problems of UK banks, the FSA had been expected to ban controversial products including self-certified mortgages, after it signalled earlier in the year that allowing customers who are not self-employed to use these loans may have been a mistake. It said yesterday that all incomes should be verified.

Self-certified mortgages, nicknamed 'liar loans' after they were widely abused, do not require customers to prove their income.

At the height of the housing market boom in July 2007, they accounted for 23 per cent of Britain's prime residential home loans. Since then, however, providers have either chosen or been forced to pull out of the specialist mortgage market and currently only two such loans are on offer from one provider.

However, the FSA said that it does not plan to impose caps on loan-to-value ratios, which some observers had feared would hit borrowers with high incomes who have little support from parents or others to fund a substantial deposit.

The FSA, which already uses loan-to-value thresholds to set capital requirements, did not rule out the application of caps in the future, after consultation with the industry, but said that it would be a 'blunt approach to achieving the outcomes we want'.

The long-awaited review also proposed plans to ban products with 'toxic combinations' of characteristics and arrears charges when a borrower is already repaying a loan, and it said that it hoped to extend its remit to buy-to-let and second-charge mortgages.

Buy-to-let popularity soared in Britain during the boom years, rising from £pounds;3.1 billion in 1999 to £pounds;44.6 billion by 2007 - growth of around 20 per cent a year.

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Martin Koh/ Sherry Tang
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