Mortgage News
MMR: Toxic loans to remain
The FSA has said it will not ban so-called toxic mortgage loans to high-risk borrowers, saying that prohibiting certain types of products is too blunt an instrument and there is little industry support for the move.
The FSA’s Mortgage Market Review (MMR) consultation paper published today said that an outright ban of loans with a combination of high-risk factors, such as high LTVs, high loan-to-income ratios, and high debt-to-income ratios, would fail to distinguish between borrowers who will and will not repay loans.
In addition, the FSA said it could unfairly penalise self-employed or right-to-buy borrowers without assessing their affordability and ability to repay a mortgage.
Implementing the ban could also prove difficult and encourage borrowers to lie about the purpose of the loan in order to get a mortgage.
Instead, the FSA is proposing to implement greater protection around vulnerable borrowers with impaired credit history, requiring them to have an additional ‘buffer’ against unforeseen circumstances, with lenders undertaking stricter affordability assessments.
The regulator had previously suggested that there may be a case for banning toxic loans, particularly if it found that default rates among borrowers with high-risk characteristics were higher than the market average.
Episode 6: What’s next for the industry? : Powered by Partnership podcast from Newcastle for Intermediaries
Sponsored by Newcastle for Intermediaries
The FSA’s analysis of the toxic loan market found that the prevailing feature in the highest risk combinations was whether the borrower had an impaired credit history.
It found that loans with the greatest number of high-risk factors, such as being credit impaired, on a high LTV, self-employed and consolidating debt, had the highest incidence of borrowers in arrears or repossession at just over 42%.
By comparison, the percentage of borrowers in arrears or repossession who were only credit impaired was just over 21%.
Respondents to the proposal highlighted that toxic lending was only ever undertaken by a minority of lenders, many of which have now left the market.
The FSA has also said high LTVs, high loan-to-income ratios, and high debt-to-income ratios will remain, as a full ban would merely penalise borrowers who are able to repay the loan. However, it noted that this stance could change following more detailed analysis of arrears and repossessions.
The consultation period runs till 16 November 2010. The FSA plans to publish its policy statement in Q1 2011.
A further consultation paper on distribution and disclosure issues will be published later this year.