Self Certification Mortgages to be banned by FSA

by Peter Jacobs

The practice of self cert mortgages where by the lender requires no proof of income by the applicant will be shortly banned by the FSA although they will still allow 100% mortgage products to be sold. self certification mortgagesThe practice for self certification mortgage applications has been so widespread over recent years that the FSA believe around 50% of new mortgages between 2007 and the first quarter of this year were provided without any proof of income. Originally these were generally set up for self employed people where it was difficult to qualify the amount of income earned or they were newly self employed so did not have the track record that was required. But the practice quickly grew and many people with regular jobs applied for self certification mortgages and some widely over estimated their income.

Of course most mortgages are granted on the basis of being able to repay at least the interest element for an interest only mortgage and that many people may now be struggling because of the recession where perhaps they now may not have a full time job.

The collapse in the mortgage market has seen higher than average defaults on mortgages that were granted on the self cert route and the FSA now wants to crackdown on these types of loans.

100% loan to value still OK

One other element which many mortgage lenders are now cracking down on is the interest only mortgage and the FSA says that 30% of all mortgages active at present are interest only and therefore have no repayment vehicle in place at all.

The FSA stopped short of banning 100% loan to value mortgages or high LTV mortgages and will allow those products still to be sold.

The recent report by Lord Turner who is the Chairman of the financial services authority showed that around 46% of households now have no money left or even a shortfall once their mortgage and living costs are paid out each month.

In the future he said that banks need to take out an affordability test on each and every mortgage application to address the current banking crisis. He continued that for general consumer protection as well as for prudential reasons there is a requirement to strengthen tests when mortgages are taken out to ensure that the application data is correct and the person or persons applying for any loans can afford to pay them and have the means to pay the entire loan off once the loan period is complete.

We at agree with this change in the law which the regulator is finally making many, many years after the housing boom and 2 years after the credit crunch started. There certainly need to be new regulations in the mortgage market and banning self certification mortgages should just be the start of the process.

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