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Good riddance to liar loans

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 19 October 2009  |  Comments 22 comments

This clampdown by the regulator means you can no longer lie about your income and get a mortgage. But the FSA hasn't got everything right.

I've spent the morning reading the FSA's Mortgage Market Review. It's an interesting document with several sensible proposals. Top of the list is a ban on self-certification mortgages.  

Self-cert mortgages are where the lender doesn't ask for any proof of income. Way back when, self-employed people would have to provide proof of earnings for several years before they could get a mortgage. So the move to self-cert was welcomed by many people. 

The problem was that lenders started doing self-cert mortgages for people who were actually employed but were poor credit risks. So it's no surprise that the FSA's research shows that self-cert mortgages were much more likely to default than conventional mainstream mortgages. 

The FSA hasn't specified how much proof should be required. I'm not saying that someone should have to provide five years' history of earnings. But it's quite reasonable that a borrower should provide some evidence of earnings before being granted a loan. 

Doing this will have several advantages: 

  • By reducing default rates, it will protect the strength of our banks which is good news for the economy and bankers.
  • It means that the rates charged on mortgages for self-employed people would be lower than they would otherwise be.
  • Imprudent borrowers would be protected from their own folly. You might think that in a free market people should be allowed to make their own mistakes. There's something in that, but I suspect that some borrowers didn't understand the risks they were taking. And if market participants don't fully understand the market - they don't have 'perfect information' in the economists' jargon - you don't have a true free market. 

Affordability 

The FSA's report also looks at whether Loan-to-value (LTV) and loan-to-income (LTI) ratios should be capped. If you have a 5% deposit, the LTV ratio is 95%. If the total debt is five times your income, your LTI ratio is five. 

Many commentators - including Gordon Brown - have said that 100% mortgages should be banned, whilst others have criticised mortgages with an LTI ratio of five or more. 

The FSA isn't proposing any such bans because it fears unintended consequences. It also argues that mortgages with high LTVs or high LTIs don't have high default rates on their own. Default rates only rise dramatically when other factors are included such as self-cert or people with poor credit histories. 

Instead the FSA wants lenders to focus much more closely on the borrower's levels of spending and see whether the borrower can truly afford the loan repayments. 

The biggest problem

Looking at affordability is sensible but I'm still inclined towards some kind of restrictions on LTI and LTV.

I think the biggest problem we've had in the property market has been the stunning rise in house prices over the last ten years. In the decade before the financial crisis, UK property prices rose by almost 300% yet the growth in average earnings was only 50%, according to the FSA.

That growth in prices had many causes, but it was also a big factor in triggering the problems that we now face. It created an atmosphere where property was seen as a one-way bet which then led to irreponsible borrowing and lending.

Hopefully, over the next ten years, prices will rise much more slowly and more in line with economic growth. I think limits on LTVs and LTIs could help on that, so I think the FSA should think again. 

> Check out more of my musings at my blog

> lovemoney.com's new mortgage tool is an innovative way of sourcing your mortgage online. Tell us your basic requirements and we can find the right mortgage for you. At any stage you can pick up the phone and speak to one of our mortgage experts.

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Comments (22)

  • Robjoy
    Love rating 17
    Robjoy said

    I bet I'm not the only person who'll say that banning self-certified mortgages will make it more or less impossible for me to ever get a mortgage again. I've never missed a payment, on my mortgage or any other loan, my credit score is about as high as you can get, but I have tried to apply for non-self-certified mortgages in the past and found that the mortgage companies wouldn't accept my evidence, and wouldn't consider my annuity income at all!

    Just as well my present mortgage is 0.39% over base rate so I don't feel any need to try to change it at the moment.

    Report on 20 October 2009  |  Love thisLove  1 love
  • AdAstra100
    Love rating 26
    AdAstra100 said

    LTI and LTV factors are vital parts of risk assessment but there are many others which Lenders should be obligated to be aware of including falling markets as Borrowers will invariably whearing rose tinted specs when trying to justify a loan being granted. For, instance, Dual income based mortagages are a minefield in the case of some younger couples but limits would have undesirable consequences for the older established family.

    Perhaps rather than set fixed LTV and LTI levels the FSA could set a point at which the Lender takes final liability unless it could be proven that fraudulent intent was in the minds of the Borrower?

    Other issues which helped fuel the credit boom were the introduction of Individual Financial Arrangements and Brown's destruction of savings as the basis for a pension which drove people to invest in property.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • catalepticdru
    Love rating 0
    catalepticdru said

    The thing that worries me at the moment is all the schemes to help people who can't afford to buy a home. Surely this will cause artificial inflation of prices if we make it easier for poorer risks to buy?

    No-one has the RIGHT to own a home, but thanks to the Tories allowing local councils to sell off housing stock, there is still a chronic shortage of social housing, which forces people to choose from buying or renting from private landlords - often expensive and with little security. The market is still unstable yet all around me I can see builders still building luxury & executive homes - when they should be concentrating on building basic, affordable family homes.

    Incidentally, it may be an idea to proof read your blog before publishing - in your second bullet point, it should be "lower" and not "lowered". And first sentence of the paragraph under "affordability" makes no sense.

    I know, I am being pedantic! However, errors like that detract from what was a well written post.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • gordonbanks42
    Love rating 11
    gordonbanks42 said

    I haven't read the FSA doc yet, and I'm hoping to find some comfort there - comfort which the headlines certainly don't furnish.

    The problem with simply banning self-cert mortgages is that there was a good reason for their existence in the first place. Self-cert mortgages are not a problem in themselves - it is their abuse that is the problem. How about banning self-cert mortgages for those who are in conventional employment (and therefore should not need them), leaving them available to those for whose needs they were originally invented?

    If self-cert goes, then mortgage lenders will certainly need to get more real about what counts as income. Irregular, variable and non-salary income should be considered, as long as there is enough if it. Otherwise we might have a system where business owners (who rely on dividend income more than others) would be unable to get mortgages. That would hardly be "pro-enterprise", would it?

    Report on 20 October 2009  |  Love thisLove  0 loves
  • james_e_taylor
    Love rating 12
    james_e_taylor said

    What a lot of rubbish. One size fits all regulations like this will have an adverse impact on many people who are perfectly creditworthy.

    What is required is liquidity!

    There should be no regulations on what people can borrow; this should be a matter for the borrower and the lender coming to an agreement. The lender should have more power to take ownership of any collateral quickly after the borrower has defaulted and borrowers who have defaulted should have means by which they can clear their credit history quickly once they're back on the straight and narrow without forever being branded a "defaulter".

    These rules would be in everyone's interests; regulation made up by a government and its cronies who have already once been caught asleep at the economic wheel will end in tears.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hello everyone,

    I'm sorry for the grammar and spelling errors. They have now been corrected.

    Moving on to the substance of the piece. Yes, we can debate about what should replace self-cert mortgages. I agree that lenders should be prepared to look at all forms of income. But they should run some form of check before they lend.

    The FSA looked at the idea of only making self-cert mortgages available to self-employed people. They rejected it on the basis that a lot of people are on the borderline between employed and self-employed so it's harder to draw a line than you might think. I should stress I'm just reporting their view on that. Not endorsing it.

    James Taylor said:

    'There should be no regulations on what people can borrow; this should be a matter for the borrower and the lender coming to an agreement.'

    That sounds fine in theory. If the only people who would suffer would be the bank and the borrower, I'd agree with you.

    Trouble is, if you don't regulate banks and their lending, they do things that create problems for all of us, and the taxpayer has to bail out the banks.

    Ed

    Report on 20 October 2009  |  Love thisLove  1 love
  • eLJay
    Love rating 76
    eLJay said

    Put the LTI to a maximum of 3 aqnd stop all this stupidity - it was always there to stop house prices becoming too expensive to buy and really the companies allowing people 5 times their salary should have been in court for mis selling.

    Report on 20 October 2009  |  Love thisLove  1 love
  • damicol
    Love rating 16
    damicol said

    This really is a nonsense. It is exactly like closing the stable door etc.

    The vast majority of mortgage funding came from the wholesale market and it was govt policies which forced land and property values ever higher by ridiculous planning restrictions. Deliberately done to ensure exactly that, rising house prices and therefore more opportunities for this govt to tax you more. It relaxed all other lending criteria to the banks , like capital ratios, allowing banks to repackage and sell mortgages and thus effectively recapitalise themselves. Investors in wholesale morgages were thus effectively taken for a ride.

    Bitten, angry and now wanting profit, they are the ones who demand better investment of their money. Hence the dearth of mortgage finance,

    Its self regulating, even if banks wanted to lend 50 times income on 200% mortgages self cert, they couldnt find a single investor would supply them with the money to lend on.

    What this will do long term, if these stupid interventions by FSA take hold is simply that when lending does ease again, and the property values reach a low enough point that the upside outweighs the downside is that mortgages would become ever more available to those refused under these proposals from overseas banks, who you can be sure, would be very happy to take the business from the UK if that met their own lending criteria.

    There is absolutely nothing the FSA can do to prevent you getting your mortgage from another bank outside the UK.

    But in either case, unless investors feel confident that their investments are going to deployed wisely in the mortgage market, there will be no funds available.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • eLJay
    Love rating 76
    eLJay said

    Of course you could get an interest only mortgage with the intention of saving as much cash as possible and emigrating when you retire with the savings with no intention to pay them back.

    Not that I would ever encourage this sort of thing.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • AuntFlo
    Love rating 24
    AuntFlo said

    Are the FSA trying to cripple small business?

    I am a small business owner most of my income is received in dividends from my company not in salary, I also keep several other people in jobs so they can get better mortgage deals than I can as they are employed. The ONLY mortgage I can get is a self cert mortgage, and at the moment I have one, I have managed to pay off over 75% of it in the first 4 years anyone think I am unsuitable to lend to? because the FSA do.

    Maybe I should lay off my loyal employees just before Christmas and get a "normal" job so I am credit worthy, this is absolutely a move to kill enterprise.

    Report on 20 October 2009  |  Love thisLove  1 love
  • eLJay
    Love rating 76
    eLJay said

    You should also be employed by your company just as they are - it may even be worth making it a non profit company which simply pays all of its employees a wage (including yourself).

    I advise you see an accountant who deals with company tax laws and see how such a move may change your circumstances.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • Mick James
    Love rating 25
    Mick James said

    Did the entire risk management profession commit suicide?

    There's nothing innately evil about 100% mortgages or even self-certification. Unless you want to go back to the old days when you had to prove you were good prudent people (like our PM who never borrows any money) by going through a period of savings and self-denial. If I can get a 100% mortgage that's going to cost less than my rent, why should I be forced to wait 5 years to house myself while I build up a deposit?

    It's up to banks to manage their own risk--what the FSA should be managing is the situation where some lenders are--or are deemed to be--"too big to fail" and end up getting bailed out. Instead of attacking the root case of the problem--too few banks--we've actually made it worse.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • Mrs C
    Love rating 2
    Mrs C said

    I am horrified about the new regulations and the banning of self-cert. Like others posting on this forum, my husband is self-employed and has a variable income, therefore the self-cert route was the only one available to us when we bought our home. We weren't reckless and put down a 20% deposit and have never missed a payment. We will now find ourselves stuck with a variable rate mortgage with a nationalised bank when our current "deal" expires next summer. Since we took out our mortgage, market conditions and some personal problems have affected our credit files fairly significantly so I know that a mainstream lender will simply laugh at us and tell us to go away. We are now seriously considering selling our home, abandoning our dream of eventual ownership and starting a different life somewhere else with the equity we have in our home. This is such an ill-thought out and generalised plan, it does not take into account a significant number of the population who are self-employed and the fallout will be disasterous for many. A nightmare indeed.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • SevenPillars
    Love rating 70
    SevenPillars said

    I find it amazing that anyone could defend self-cert or fast track mortgages given that it is these products that effectively form the majority of the hidden sub-prime problems that the housing market and UK economy is going to face going forward.

    There is nothing wrong in itself with self-cert, provided the banks had actually regulated themselves and only gve them to people who would normally qualify like the self-employed. The banks must have known for years that questionable practices were going on in the market as by 2007, half of all mortgages were self-cert or self cert 2, those fast track mortgages with a little checking (about 1 in 10, but probably no checks at all knowing the banks). Those providing the funding to the banks must have also known this as well and that is why after the sub-prime blow off in the US in 2008, they pulled the rug from under the likes of NR, B&B and HBOS. They began to wonder if they would ever get their money back. In the end, the taxpayers were forced to guarantee it all.

    The problem here, is that the UK housing market is not a free market as such, in that when prices go down everything that can be done to keep prices high, whether it is artificial or otherwise is brought to the table to keep it all going. The banks that engaged in questionable practices or closed their eyes to self-cert and fast track should have paid the penelty by being allowed to go out of business, after all, is this not what would have happened in a free market? Unfortunately, those in power feared the systemic risk, so they ditched the moral hazzard of the last 10 years in favour of bailing out the conmen, speculators, gamblers and imprudent to "save" the banksters world.

    The funny thing is, I can't be the only one who finds it remarkable that given human nature, especially where money is concerned, the banks and their supporters thought that it was ok to not check the claimed income levels of people that were making the largest investment they would ever need in their lives as house prices continued to go up 10-20% a year in a supposedly 2% inflation economy. Truly remarkable and we will be paying for it for years to come.

    As to the difficulty some think they now face because the FSA have finally woken up and started to do the job that they backed out of in 2004, has it not occured to you that as prices went up on the back of this loose lending and fraud, not that its gone the free market should be allowed to work so that prices will now fall to meet the new reality of what people can really afford? Oh I forgot, "they" want to defend prices at the bubble levels in this free market, so now we see a distorted market in which only genuinely high salaried workers with big deposits can afford as monthly sales are down 50-60% from the peak. If we are to ever get back to a genuine market then prices have to fall, otherwise, if you are a seller you could be waiting a long time if you think you can get a 2007 level price.

    So, three cheers to the FSA, assuming they don't give in again to the housing market VI's. Let's see how long the VI's can defend house prices at these levels now that all buyers will be required to prove their income. It's not asking much, is it?

    Report on 20 October 2009  |  Love thisLove  0 loves
  • nickpike
    Love rating 270
    nickpike said

    How are those on self cert going to remortgage when the initial fixed deal runs out?

    Three and half times wages and a 10% deposit evolved for a reason and was in place for decades. This made sure that a mortgage was affordable if financial situations changed. Also, it controlled house prices so everyone with a job had a chance.

    If you need self cert to be able to buy, in other words, borrow more than the above criteria, maybe you cannot afford the house in the first place, and gives no 'safety valve' when conditions change, which are almost guaranteed over a 25 year period.

    Self cert will always inflate prices, and hurts those on wages. We seem to have become very greedy. You might get a warm and fuzzy glow thinking the house is worth squillions, but that's only any good if you sell. Meanwhile young couple want to buy but cannot. We should be ashamed as a nation.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • SevenPillars
    Love rating 70
    SevenPillars said

    For anybody who wants to watch the original BBC, Money Programme, "Mortgage Madness" which exposed self-cert fraud in 2003, here's the link on Google.

    http://video.google.co.uk/videoplay?docid=-8482518243122067675&hl=en-GB#

    In 2004, the FSA decided the market didn't need to be regulated after assurances from the banks.

    Report on 20 October 2009  |  Love thisLove  1 love
  • Mrs C
    Love rating 2
    Mrs C said

    Nick Pike....regarding your post. We didn't take out a self-cert mortgage because it meant we could borrow more, we took it out because as a lot of self-employed people find, mainstream lenders will not touch you when you do not have a regular income and payslips. This is our third house. We didn't have three years of accounts either and that was the only choice we had at the time. We assessed our income based on my husbands' forecast workload at the time and my part time salary. Our borrowings were 3.5 x that amount. As I said before, we put down a 20% deposit. We were not irresponsible or reckless and didn't borrow more than we could afford. Self-cert was designed for people like us, not those who were employed and with dreaful credit records who wanted to do just as you describe. However, through no fault of our own we are tarred by the same brush and I find that abhorrent. There is no safety net for us and that is the consequence of blanket reform.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • james_e_taylor
    Love rating 12
    james_e_taylor said

    Hi Ed,

    In response to your response: the taxpayer doesn't have to bail out the banks. The banking system was in crisis, that is correct. But that was because banks weren't being banks any more.

    Indeed, banks weren't lending any more, in the traditional sense. They were just shuffling a deck of blank cards backed by liar loans, keeping some for themselves and passing others on to other banks polluting the whole system.

    Deposit taking institutions that are required to keep the financial system afloat should have government guarantees and tight regulation so that people can have confidence in the system. But other firms should be allowed to act unregulated. The problem with regulating mortgage lending rather than systemically important institutions is that all mortgage lenders and borrowers suffer.

    Report on 20 October 2009  |  Love thisLove  0 loves
  • msmoneywise
    Love rating 27
    msmoneywise said

    After years of simplified remortgaging, I've retired at 50. My actual monthly income has increased because I take a regular monthly income from my investments equal to what was my take-home salary + I now have a small pension coming in. My current tracker (0.24 over BR) finishes at the end of this month.

    I tried to see what I could get as a self-certifying applicant, on the lovemoney.com mortgage finder. Not a lot. Apparently, there is nothing that fits my criteria.

    I have overpaid through the low interest rates, and have an excellent credit history, but my investment income is considered 'variable and uncertain' so I am not considered a good credit risk, apparently! Right now my lender's SVR is not bad at all, so I'm happy staying on it, but what if the base rate goes up? 

    Report on 21 October 2009  |  Love thisLove  0 loves
  • organgrinder
    Love rating 4
    organgrinder said

    It's just another knee jerk reaction to a problem which in the main, doesn't exist.

    Self certification mortgages have always been an opportunity to side step the system but if, as has been said before, they were restricted to those they were designed for I see no problem at all. In particular, if the loan to value ratio used left a reasonable amount of equity, I would consider these types of mortgage to be essential to the wellbeing of the housing market and all the small business owners in the country.

    Typically though these rules will have been devised by people in safe employment who have no experience of being self employed or of the problems such people face in trying to get finance. They also have no idea how important such people are to the economy of the UK and forcing them out of their houses or into profit boosting higher rate products will do little to encourage the entrepreneurs we need to pull us out of our current troubles.

    Report on 21 October 2009  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    In response to James:

    As you know there were many causes of the crisis, but the catalyst was irresponsible sub-prime lending in the US. The actions of all mortgage lenders can affect all of us. Not just the big deposit-taking institutions. All mortgage lenders should be closely regulated.

    Another benefit of some limits on the mortgage market is that it will help to keep house prices down. That would be hugely welcome and is the thing that will benefit first-time buyers the most.

    Ed

    Report on 21 October 2009  |  Love thisLove  0 loves
  • guppy100
    Love rating 0
    guppy100 said

    The market is still unstable yet all around me I can see builders still

    building luxury & executive homes - when they should be

    concentrating on building basic, affordable family homes.

    Can some one define what a luxury or executive home is please?

    I guess people's perceptions differ. But what I have seen built around me for atleast 10 years is basic but unaffordale housing, and unfortunately I bought one of these 8 years ago.

    Gups

    Report on 26 October 2009  |  Love thisLove  0 loves

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