Mortgage Famine or Financial Famine?

by Mark Johnston

The FSA is hoping that new plans to regulate the mortgage market will put controls in place to stop another financial crisis like the one we’ve just seen.

The rules are expected to put an end to risky lending and loans that borrowers cannot afford to repay. The FSA has explained its plans as “The mortgage market review aims to address the major failures that have occurred in the mortgage market and to replace risky lending and unaffordable borrowing with common sense standards”.

The mortgage review is expected to regulate the large UK mortgage market which has been attributed as the main cause of the credit crunch a few years ago. Lenders have hit back with claims that the rules will limit lending to even safe customers with good credit histories.

Steve Morgan, the chairman of Redow a leading house builder in the UK said: “Deliberately suppressing housing demand at the very time that the country has a chronic housing shortage is laying the foundations for the next boom/bust cycle”.

Mr Morgan even went as far as suggesting that the city regulator’s plans could cause a mortgage famine in the Uk. He pointed out that “For generations 95% mortgages have been the norm … Yet the current generation of first-time buyers are being denied the opportunity that their parents and grandparents took for granted, simply because they are unable to secure an affordable mortgage with a modest deposit”. Only a small handful of lenders offer 95% lenders but they are hard to get and come with a multitude of restrictions.

Other industry insiders are hoping that the market review will force lenders to be more careful in who they lend to and make sure they have facilities in place to pay the loan off in the future. But the home loan trade body, the Council of Mortgage Lenders has suggested that the FSA’s plans aren’t fit for purpose going as far as saying they are “flawed and impractical”.

The city regulator the FSA defended itself by sayings “Even a modest rise in interest rates could lead to a significant increase in the number of families suffering financial distress. This is why it is imperative that we ensure lenders act responsibly and do not return to irresponsible practices, in order to protect consumers from taking on mortgages they cannot afford and potentially losing their homes. No doubt this is why our proposals have been characterised by a number of firms as simply marking a return to “sensible underwriting” and common sense.”

It seems that on the face of it, the FSA is right. The industry needs to protect potential borrowers from financial difficulties if their circumstances change or if there is a large house price fall, which looks more likely each day. Although it’s a difficult pill to swallow for the thousands of would be first time buyers that have been priced out of the market. It would be a bad day for the UK when our financial industry knowingly offers mortgages to people that cannot afford them.

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