High LTV mortgages at risk when FSA goes

by Mark Johnston

Following the announcement to completely overall the financial services industry in the UK, the government has taken the decision to scrap the financial services regulator, the FSA.

The responsibility to regulate the industry will be returned to the Bank of England with a new regulatory body being set up to tackle economic crime. Under the new system the Bank of England will be responsible for the economy through inflation targets and bank regulation or what some are calling ‘macro-prudential regulations’ which just means that the Bank of England will judge and control risk as a whole instead on each risk separately.

The new Chancellor of the Exchequer, George Osbourne has brought about these changes as part of the sweeping reform that the new coalition government promised during the election. The FSA was set up to regulate the financial industry when Labour look power from the conservatives in the 1997 general election..

In the past the regulation has been carried out between the FSA, Bank of England and the Treasury but this has been criticised and widely blamed for the recent economic crisis.

The news that the FSA is to be dissolved may have a serious impact to the mortgage market especially for those with little or no deposits who are looking for a high loan-to-value mortgage.

These high risk loans are the very same sub prime lending that caused the financial crisis back in 2007/2008. Sub-prime mortgages the riskiest category of consumer loans as they are sold both to borrowers who present a higher risk of payment default and also to borrowers who have little to no deposit which means there is no buffer in-between the market value of the property and the loan itself. This means that if the property is repossessed them the lender will struggle to recoup losses. When this happens on a large scale we see bad debt hitting lenders balance sheets that can snowball into the crisis that we have recently seen.

In the new role, the Bank of England will be looking to avoid any future crisis and will want to avoid creating another housing market bubble which was created by the irresponsible lending in the sub-prime market.

One of the measures that the Bank of England may take is to restrict lenders activities in these risky markets by banning 100% LTV mortgages or capping the amount home buyers can borrow in relations to their income. Any such remedial action would make it difficult or impossible for first time buyers to get on the market.

Inflated house prices and low incomes means that first time buyers are left out in the cold. The Council of Mortgage Lenders reported that these borrowers are still locked out of the market and are finding it difficult due to the lack of high LTV. With the average house price at close to £225,000 first time buyers need to find a whopping £52,000 which is twice the average annual salary in the UK. Whatever happens, with the need for tougher regulation and a inflated housing market the future looks tough for people looking to get onto the UK property ladder.

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