The FSA wants to do away with self certification mortgages, according to its mortgage regulation discussion paper released this morning.
The paper dealt with a lot of other matters too, but it was the self-cert recommendation that met with the loudest protest from mortgage brokers and those representing borrowers.
Would banning self-cert (or at least, 2007-style self-cert) really penalise as many potential borrowers as it has been claimed?
I'm not convinced the protests are all that justified. Here's why...
First, the suggested ban is on outright self-certification: saying you can afford a loan without having to provide any sort of proof.
What it's not is a mortgage ban on the self-employed. It wouldn't prevent mortgage lenders from finding other ways to certify borrowers. It just might require borrowers and lenders alike to be a little less lazy, or a little less hasty. Now that we're on the sour end of the housing bubble, who could disagree with that?
For the borrower with complex cashflows that don't provide a Xerox-ready payslip, there are various ways that affordability can be demonstrated. I don't buy the following quote from Katie Tucker of Mortgageforce:
“The harsh reality of it now is those who cannot quantify their income will not be able to get a mortgage; the whole group will be removed from the market.”
Honestly, who can't quantify their income? Those who get paid in chickens? Fair enough, but they're probably building their own farmhouse, not looking for a £150k loan on a flat in Manchester.
Everyone can quantify to some extent. The discussion paper simply calls for verification of income. It doesn't specify how lenders should do this. But it does say: don't just skip the step.
Second, let's be frank: that kind of self-cert was too easy. Why else were so many borrowers (up to 6 in 10 mortgages) choosing this method?
Plenty of employed people were – and they're not whom it was intended for. Because it was easy to self-certify, this enabled employed borrowers to get around other lending criteria such as income multiples. And in the stampede to get on the ever-escalating housing ladder over the last decade, it's not surprising that people took any route they could.
A crucial change of assumption in the FSA's discussion document is that it no longer expects borrowers to act rationally and protect themselves from credit exposure. And to be fair, there's plenty of evidence to back up this view. The report generalises as follows:
“Mortgage borrowers are typically motivated by an immediate want or need [...] in many cases the mortgage is simply the means by which the consumer can get the desired home, car or holiday – with the consumer focusing much more strongly on the end result”
The point is: if it's possible to go around barriers like income verification checks in order to get a large amount of credit, people will do so. Hence the proposal to remove the loophole.
How best to assess borrowers?
There's always going to be a dilemma over the best way to measure a borrower's eligibility, and lenders have already started moving away en masse from one lazy way of doing that - straightforward income multiples - towards the more 'nitty-gritty' approach of assessing affordability.
So it's not too much of a leap to dismiss another way of doing it. Yes, it'll cost lenders to do more thorough checks. Unfortunately this cost will probably be passed on to borrowers. But we're currently (as taxpayers) already shouldering the costs of failing to adequately check out potential borrowers.
Either way, we won't be mourning the demise of old fashioned exaggerate-your-income mortgages, and we think it's inevitable lenders will move towards more of a know-thy-customer model.
What do you think?
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