Britain's financial regulator plans to force mortgage lenders to check the income of all borrowers, scrapping so-called "liar loans" blamed for helping to fuel bad debt problems at the heart of the credit crunch.
In the first draft of plans to overhaul the mortgage market, the Financial Services Authority said on Monday it would impose affordability tests for all home loans, a move that would force consumers to detail spending before a loan is approved.
But it stopped short of capping loan to property price ratios that could have effectively banned mortgages like the 125 percent loan offered by Northern Rock before its near-collapse. The initial findings of the review - which reflects the increasingly hands-on approach of a regulator widely criticised in the aftermath of the credit crunch - also called for the FSA's scope to extend to buy-to-let mortgages.
-- Plan would ban self-certified mortgages
-- Plan would impose affordability tests
-- Stops short of imposing loan-to-value ratio caps
"There are clearly certain types of loans which should not be made and there are clearly some consumers who should not place themselves in a position where they wouldn't be able to repay that mortgage in the future," FSA CEO Hector Sants said. Sants told BBC radio that risk was useful to innovation, but warned the mortgage market had simply become too complex.
"Back in 2007 there were something like 10,000 different mortgage products available, something like 3,000 or so products available in the sub-prime area. I think that's a level of complexity we could well do without," he said. Mortgage debt in Britain, which soared in the boom years, now amounts to some 1.23 trillion pounds, according to the FSA, and accounts for around 70 percent of all credit extended.
Changes to mortgage regulation are a key plank of reforms which the FSA and the government hope will avoid a repeat of the unbridled boom in household debt in the run-up to the crisis. "We... call on the industry to start making changes immediately. They don't have to wait for final rules to adopt fair and responsible lending practices," Financial Services Secretary to the UK Treasury Paul Myners said.
The British Bankers' Association welcomed the review, but warned against rules that could entirely cut off higher-risk borrowers, such as the self-employed and first-time buyers. Criticised for failing to prevent the debt problems of British banks, the FSA had been expected to ban controversial products including self-certified mortgages after signalling earlier in the year that allowing customers who are not self-employed to use these loans may have been a mistake.
It said on Monday that all incomes should be verified. Self-cert mortgages, nicknamed "liar loans" after they were widely abused, do not require customers to prove their income. At the height of the housing market boom in July 2007, they accounted for 23 percent of Britain's prime residential home loans.
Since then, however, providers have either chosen or been forced to pull out of the specialist mortgage market and currently only two such loans are on offer from one provider. Buy-to-let popularity soared in Britain during the boom years, rising from 3.1 billion pounds in 1999 to 44.6 billion pounds by 2007 - growth of around 20 percent a year.
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