The Financial Services Authority’s decision on July 13, 2010, to prevent UK banks from accepting self-certified mortgages, conjures up nothing so much as the sound of stable doors slamming long after the horses are over the horizon. Had the FSA come out with this ruling in 2007 we could all have applauded long and loudly and perhaps the Conservative/Coalition government would not have been quite so quick to flatline the regulator and give its duties back to the Bank of England. Certainly, the UK’s own variant of the subprime fiasco would not have been quite as bad. And if the FSA had had the good sense to issue this edict two years earlier still, then we may well have been spared the sight of the bank runs on Northern Rock and the dear old Bradford and Bingley Building Society might have escaped nationalization.
While there is something to be said for better late than never, we have to wonder if any ruling that cuts back on mortgage lending at a time when there is way too little mortgage lending going on, is particularly sensible or relevant. As a handy marker for the future it makes a kind of sense, but doing it now when banks are being about as cautious in their lending as it is possible for banks to be does not do that much to suggest that the FSA has finally gotten its finger on the pulse.
In many ways the FSA’s latest ruling is simply symptomatic of the kind of “re-regulation” of national banks that we can expect to see breaking out right across Europe. From the FSA’s standpoint, this ruling is all about “ensuring that all lenders get back to the basics of responsible lending, and that problems are prevented before they can develop or get out of control.”
Some of the key proposals the FSA has put forward include:
- The imposition of affordability tests for all mortgages, with lenders having an absolute obligation to assess the consumer’s ability to pay;
- The verification of borrower’s income;
- Something calling itself “extra protection” for vulnerable customers with a credit-impaired history (a very good working definition of a sub prime mortgage borrower).
The proposals are part of the FSA’s consultation document on the future of the mortgage market and come out of a lengthy review the FSA has conducted into the practices of the mortgage market since 2005. What this review has shown is that some 46% of households in the UK had either no money left, or a shortfall, after making mortgage payments.
The FSA also found that almost half of all new mortgages issued between 2007 and the first quarter of 2010 were self certified, with no verification checks on income. That is a staggering statistic and speaks volumes for the sheer weight of underperforming housing debt on bank balance sheets, much of which is still hidden on the “extend and pretend” principle.
Worryingly, and this part is at least topical, the FSA found that the share of interest-only mortgages, where the borrower leaves the settlement of the principle to some distant never-never date, has been steadily increasing. At the peak of the market these kinds of loans amounted to 30% of all housing loans issued.
The age old dilemma for politicians and the regulators alike - and it is a dilemma that caused the Democratic Party in the USA to add fuel to the sub prime fire - is that if you tighten borrowing so that the “financially vulnerable” don’t get loans, then they don’t get houses. A whole class of people get excluded from “the good life”, which is irrevocably based on the 25 year mortgage. What this latest move by the FSA signals, in effect, is a political retreat from the idea of homes for all. Since the push to extend housing for all created the conditions for the US sub prime fiasco that retreat is probably no bad thing in the short term. But the problem has not gone away.
Further reading on the sub prime fiasco and “liars loans”
- Ladies in Waiting, Viewpoint by Tim Hindle
- Only White Swans on the Road to Revulsion, by James Montier
- Risk Management at a Crossroads, by Maureen J. Miskovic
Tags: banking , financial crisis , Financial Services Authority (FSA) , mortgages , regulation , subprime , UK