In its Mortgage Market Review: Responsible Lending consultation paper, published this morning, the regulator outlines a number of measures it says will help ensure all mortgages are carefully assessed to make sure borrowers can afford them.
It says lenders will require verification of borrowers’ income in every case to prevent over inflation of income and mortgage fraud.
Additionally, it proposes extra protection for vulnerable customers with a credit-impaired history.
It says the proposed changes aim to ensure all lenders “get back to the basics” of responsible lending and that problems are “prevented before they can develop or get out of control”.
They form part of the FSA’s review of the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.
The FSA found that:
- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
- Borrowers with a credit-impaired history are particularly vulnerable.
Lesley Titcomb, FSA director responsible for the mortgage market, says: “There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.
“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”
Today’s report also includes the key findings from the FSA’s review into arrears charges, which indicated significant variation in the level of arrears fees across the market.
The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.
The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.
