FSA waters down mortgage rules review

Mortgage lenders have reacted positively to outcome of a review of home loans by the Financial Services Authority (FSA) which they previously feared could see half of all lending rendered unviable.

Issuing a formal consultation on the new rules the FSA today admitted it had “significantly amended” the proposals following feedback on the draft proposals in 2010, with measures more limited than originally envisaged.

The proposals, which will be finalised in the summer and introduced only in 2014, will mean that incomes have to be verified before all mortgage approvals, and that the ability to repay a mortgage should be assessed on the basis that interest rates may rise in future.

In addition the availability of interest-only mortgages will be limited, and lenders will have to consider whether borrowers’ incomes are enough to support expenses such as fuel and council tax bills as well as the mortgage itself. Importantly, however, existing home owners with mortgages issued under the previous rules that may fall foul of the new regulations can be exemptions and offered mortgages on similar terms.

The earlier proposals, which the Council of Mortgage Lenders said could have seen “the end of the age of home ownership,” proposed a stiffer affordability test, the banning of self-certification mortgages, and additional tests for “high risk” borrowers.

The CML  said the FSA had listened to its concerns and issued a “far more workable and appropriate set of measures.” Director general Paul Smee said: “While there is much detail to be pored over, the FSA’s new proposals seem to strike broadly the right balance. If lenders are to make their contribution to improving the supply of housing and to the wider agenda for economic growth, then they need a regulatory framework which also supports that objective.

“We look forward to working with the regulator to iron out any remaining wrinkles.”

Lord Turner, chairman of the FSA, said: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers.  While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”