Similar to it’s well known namesake, the MMR is designed to immunise against the possible ill-effects of another boom-time credit party, protecting us all against the ravages of excess and poor lending practices that brought the UK economy to its knees.
What the FSA was hoping, was that this could be achieved with as little side-effects as possible, especially given the state of the housing market in general at present.
The good news is that this morning the FSA have every right to have a smile on their faces after producing a thorough, though no doubt provocative, piece of work which achieves a great deal of its original aim. What is most pleasing, is that there is evidence that the FSA have held a genuine consultation period, taken much in, listened and ignored where both was necessary.
Of course there will be those that say these rules have either gone too far or not gone far enough, but on the whole it would be perhaps a little unfair for us to sit here and pontificate on the “could have should have” debate.
In essence, the whole underlying premise can be broken down into three key words; affordability, advice and realism.
At its’ core are 3 main principles for “good mortgage underwriting” :-
- Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
- This affordability assessment should allow for the possibility that interest rates might rise in future
- Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.
Let’s face it, it is pretty hard to argue with any of those as a basic starting point. What is important however, is how they are interpreted and whether there are strict rules on each.
At first glance, and let’s be honest although I had an advanced copy I have not read all 438 pages, this is quite a balanced blend of prescriptive rules and general guidelines that leave some flexibility for both lenders and consumers.
The first key point is around income and affordability; and here it is prescriptive “Income will have to be verified in every mortgage application”.
This means an end to self-certification, which although this has disappeared anyway, the lid is being well and truly bolted shut to prevent a return. It also means potentially an end to fast-track lending, where whilst mortgage advisers needed to have evidence of income on their file ready to present to the lender at a moment’s notice, lenders only checked a sample.
Whether lenders will still find a way to do this now they are ultimately responsible remains to be seen, but I for one will not shed a tear for the end of fast-track in its entirety. All of this is sensible and will help to combat worrying levels of fraud.
Before you start to shout about the self-employed, for whom self-certification was initially designed for before it became so miss-used, again refreshingly the FSA have recognised this. There are no “prescriptive requirements for self-employed customers” and therefore lenders do retain a level of discretion over how they underwrite in this sector. As the report says, ” Our aim is to ensure that lenders take an informed lending risk based on the evidence – not disregard the risk altogether.”
Also, affordability will need to be calculated on a capital repayment basis, again something that many lenders do now anyway. Recognising that interest only is a “niche product”, which is suitable for some, gone are proposals to outlaw interest only mortgages altogether.
Instead “interest only mortgages can still be offered as long as borrowers have a credible plan to repay the capital, but relying on hopes of rising property values is not enough”.
So whilst lenders retain some discretion over how they calculate affordability, they must be robust and must also take into account possible future interest rate rises. In other words, if you can barely afford the mortgage at today’s historically low tracker rates, and / or on an interest only basis, well, you won’t qualify for a loan in the future.
This is of course entirely sensible and is something that any mortgage adviser worth their salt has been doing anyway for many years. Which leads on nicely to one of the other most important parts, advice.
The FSA have recognised that proper advice should be the cornerstone of any mortgage proposal and that there is a large degree of confusion from the general public over whether they are receiving advice or not. It has always seemed crazy that in this day and age, especially after the events of the last few years, a 1st Time Buyer with no experience can walk into a bank branch and obtain a 90% LTV mortgage with no advice!
Therefore the FSA propose to remove the non-advised sales process, “requiring all sales which involve spoken or other interactive dialogue with the consumer to be advised“.
This is a brave and necessary step taken by the FSA which not only levels the playing field between Mortgage Advisers and direct lenders, but will improve the prospects for all consumers taking out the largest loan they are likely to obtain in their life.
There are opt-outs for those to proceed on an execution only basis for professional or High-Net Worth consumers, although I have seen a good many mortgage advisers who need advice just as much as the next guy!
This means that a purely online basis where no conversation is had can proceed without any advice.
The FSA has also gone further in identifying vulnerable consumers, such as those consolidating debt, who will not be allowed to opt-out and must always take advice. This is stunningly simple common-sense and the FSA should be applauded for this.
In order to improve client understanding, there are simplifications to the Initial Disclosure Document, changes to Key Fact Illustration trigger points to avoid information overload and the requirement of “firms to give the consumer a plain and simple explanation of whether there are any limitations in the product range they provide.”
There has also been some recognition to those Mortgage Prisoners who can still prove they can afford the loan but need to move and may be in negative equity, for example. Lenders are given some discretion over these rules for existing customers with a good track record in order to keep the market somewhat liquid and allow for some much needed job transiency.
These “Transitional Arrangements” only come into play where there is no additional borrowing and the monthly payment will be the same or less than the existing payments.
Obviously the devil is always in the detail and I am sure there are other points of interest, especially where niche products such as Bridging loans are concerned, which will be highlighted in due course.
However, as the arguments begin until this consultation phase ends on March 30th 2012, it seems that whilst this may not be the ultimate panacea to please everyone, it is a sensible, practical and courageous offering which will do much to ensure the illness does not become an epidemic again, whilst it should also avoid critically harming the patient.