There is still a place for self-certification in the mortgage market, argues Guy Garrard, head of business development at Tiuta.
The FSA has recently published its Mortgage Market Review feedback statement summarising the responses received following its discussion paper, which was published on 19 October 2009.
The FSA noted receiving 178 responses from a wide variety of stakeholders, including lenders, intermediaries, trade associations, individual consumers, consumer representatives, professional bodies, the government and other entities and individuals. Most respondents provided comments on all the questions asked, while some preferred to respond to a subset only. Tiuta was one of those happy to provide feedback.
The regulator now plans to publish a policy statement in June this year outlining the rule changes that have emerged from the Mortgage Market Review. The FSA reported that respondents largely agreed with its assessment on prudential reform and the proposal not to impose additional measures beyond those proposed as part of the overall prudential reform agenda. It added that it is aware that the level and pace of regulatory change currently occurring at both a national and international level is unprecedented and remains conscious of the potential impact on both firms and consumers in the mortgage market. This is a welcomed acknowledgement and The Association of Mortgage Intermediaries has gone on record welcoming the statement saying the regulator deserves the industry’s support for not rushing to introduce change during a difficult period for the mortgage market.
Indeed the FSA has certainly come in for a great deal of criticism recently but it is the right decision to listen to industry voices and not to implement changes for the wrong reasons and it will be interesting to see how it will tackle this feedback.
On delving deeper into the feedback statement, one of the main areas of contention was regarding the potential prohibition for the sale of loans above certain LTV, LTI or DTI thresholds. We agreed with the vast majority of respondents who did not support imposing an LTV/LTI/DTI cap on consumer protection grounds. Such an approach would be too simplistic and would not take into account individual lifestyles and personal disciplines.
The FSA did report that there was support for the proposal to prohibit mortgages sales to borrowers with multiple high-risk characteristics but nonetheless the majority of respondents were still opposed to a ban.
The regulators proposal to make income verification a requirement for all mortgages generated a polarised reaction. Those that supported the proposal argued that everyone should be able to verify income, even if the income sources are diverse or the income streams irregular. Support was particularly strong from consumer bodies, but also from smaller lenders, intermediaries and some trade associations.
In theory there can be no objection to this requirement. A client can afford or not afford the mortgage based on the lender’s LTI or DTI criteria, and it can be argued that all borrowers must be able to verify a level of income they claim on the application form. But this is a simplistic approach which will cause difficulty to some applicants who should, justifiably, be able to self-certify. It is hard to argue against requiring verification of income for employed persons who must be able to produce payslips, bank statements, etc to confirm income. However, self-certification for this group was used in the beginning because lenders were inflexible and inconsistent in what they would take into account for an employed person’s earnings. Some would restrict what they considered acceptable as a percentage of overtime, bonus, commission, additional employment, etc – whilst allowing the applicant to self-cert the whole of the income in return for paying a higher fee or interest rate. If full verification for employed persons is required, lenders must become more flexible over what earnings, particularly in the modern employment environment, they take into account. Self-employed persons have always found it difficult to demonstrate affordability through verifying pure net profits and, often, cannot produce up-to-date accounts if the business is relatively new. Self-cert justifiably recognised the different earning profile of a self-employed person to an employed applicant. So taking all of the above arguments into account our answer must be no to a general prohibition of non-income verified mortgages. We feel that the industry as a whole will be disadvantaged by the widespread criminal use of self-cert by a few intermediaries, abetted by poor plausibility checks by a small number of lenders – most of whom have now exited the market permanently.
It’s clear the message going forward with any more regulation is – gently does it. The specialist markets continue to struggle as lenders don’t have access to necessary funding and attitudes to risk continue to stifle the market which is unsurprising given the regulatory glare. With this in mind if the structures of these sectors are altered the regulator needs to be surefooted enough to ensure that the whole market doesn’t collapse. As this could be the straw that broke the camel’s back and could potential send the whole mortgage, and especially the intermediary, market to the brink.
