An End to Risky Lending?

by Mark Johnston

Risky mortgage lending played a significant role in the credit crunch that started the financial meltdown of the past 4 years.

The housing boom saw 100% plus mortgages and ‘pile-em high sell-em cheap’ supermarket style mortgage pricing.

When the market peaked in 2007 just about anyone could walk in to a high street mortgage lenders branch and apply for a 125% loan to value mortgage.

Although the mortgage market seems to have almost corrected itself, the Financial Service Authority (FSA) has published its recommendations for reform. The mortgage market review (MMR) aims to make sure lenders can never return to the type of irresponsible lending that lead the world economy to virtual collapse.

Simon Lambert of ‘this is money’ website states that “an industry that behaved like this just a few short years ago needs tougher rules”.

According to the Mail newspaper however, up to a million borrowers could be turned down for mortgages under a tough new crackdown on lending.

The paper went on to suggest that under the new Financial Service Authority’s (FSA) proposals, anyone seeking a mortgage will be required to provide much fuller evidence of basic household spending, from fuel bills to childcare costs and clothing before lenders will sign off their loans.

In answer to this claim Lord Turner, chairman of the Financial Service Authority (FSA) said that “at the moment these proposals would make little difference to the mortgage market as it exists right now. Where it would make a difference would be if the housing market experienced the same boom as in 2005 to 2007”.

The Financial Service Authority (FSA) claim that the number of new mortgage applicants will be unaffected by the new plan. The proposals will have significant ramifications for specific groups of borrowers.

Self certification:

These mortgages, known in the industry as ‘liars loans’ will be banned with affect from 2013. These products were supposedly aimed at customers who found it hard to prove their incomes, such as the self employed. In reality they actually allowed some borrowers to exaggerate their incomes, therefore allowing them to obtain mortgages they could not afford.

Interest only mortgages:

The financial service Authority (FSA) wants to reduce the number of these mortgages dramatically. New borrowers applying for interest only deals will have to prove to lenders that they have a ‘believable’ strategy for repaying their loans under the new proposals.

Income stress test:

Under the new proposals lenders will be able to request access to would be borrower’s income and expenditure in order for them to establish whether or not they will be able to keep up their repayments even if there is a raise in the base rate.

Over 50s:

Lenders will take a more ‘robust’ approach to borrowers who are approaching retirement. They will look to prevent older people taking on mortgages they will not be able to afford once they retire.


Those who would not qualify fro a mortgage under the new proposals but who already hold a mortgage will have the rules effectively waived. This is providing they have maintained a good repayment record and they must also apply for a loan equal to or less than their current mortgage.

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