/world business
LONDON, England -- -- Mortgage borrowers will have to pass new affordability tests and be able to prove their income to qualify for new loans following a sweeping reform of the market by the Financial Services Authority.
The City regulator on Monday laid out wide-ranging new rules that it believes will ensure the mortgage market "works better for consumers and is sustainable for all market participants".
Key features include the introduction of affordability tests for all mortgages; a ban on "self-certification" mortgages, which do not require verification of borrowers' income; a ban on the sale of mortgages that contain certain "toxic combinations" -- such as offering a high loan-to-value loan to a borrower with a poor credit history -- and restrictions on charges lenders can impose if borrowers who are in arrears are making some effort to repay their loans.
The regulator also put more responsibility at the doors of banks and building societies, saying it wanted to make lenders "ultimately responsible for assessing a consumer's ability to pay" and that it required all mortgage advisers to be personally accountable to the FSA.
But it stopped short of banning riskier types of mortgages, such as those that offer 100 per cent or more of a property's value or a high multiple of a borrower's salary.
Jon Pain, managing director of supervision at the FSA, said: "The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress. We recognise that we need to bring about a step change in regulation and we need to act now to address the issues we have identified."
He said the FSA's review had shown a "rapid explosion in mortgage products; the emergence of high-risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end".
"The FSA needs to ensure that firms only lend to people who can afford to pay the money back," he added.
The British Bankers Association said in a statement: "When they offer mortgages, the UK's high street banks pay particular attention to their affordability for each individual customer, considering a range of factors which is not limited to salary multiples or loan-to-value ratios. Therefore the banks welcome the FSA's similar emphasis in this paper on the overall affordability of the mortgage for the customer, and their focus on mortgage broking activity and higher-risk lending.
"It should be a firm principle of mortgage regulation that higher-risk borrowers such as self-employed people and first-time buyers are not effectively cut out of the market."
The Building Societies Association said that while much of the review was sensible, it had "significant reservations" about the possible unintended consequences of some of the ideas expressed.
"We need a sensible balance between appropriate regulation and allowing people to buy their own home when they can afford to do so," said Paul Broadhead, head of mortgage policy at the BSA.
The group felt the outright ban on self-certification mortgages was a step too far.
"Such products are suitable for a minority of people, and an outright ban is not appropriate," it said.
The Council of Mortgage Lenders called the review "well thought-out and logical", although it said it was "ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of 'irresponsible lending'".
The FSA also called for its powers to be extended to cover buy-to-let loans, which it does not currently monitor.
© The Financial Times Limited 2009
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