We don’t need loan-to-value rules!

by John Fitzsimons on 16 October 2009  |  0 comments
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The FSA has gone quiet on the possibility of regulating just what loan-to-values banks can lend. Good!

Next week, the FSA is due to publish its latest report on regulating the mortgage market. I bet you're all on the edge of your seats for this one, right?

This latest report will follow its last study into mortgages, back in April. Around that time, the papers were full of stories suggesting the FSA would propose limiting how much a bank could lend as a loan-to-value. An end to 100%, and possibly even 90% or 95% mortgages.

The reason the papers were full of such stories was that the FSA had leaked that information, to gauge the likely reaction to such a move. And it got slaughtered by the industry press, to the point that in the eventual report, the FSA merely said it was still open to the possibility of loan-to-value limits.

This time around, the papers are full of stories about self-cert and fast-track mortgages being banned instead. There has been absolutely no mention of restrictions on loan-to-values.

And thank goodness for that!

Such restrictions would be utter lunacy, and set a dangerous precedent. Why ban at 95%, and not 93%? Or 90% and not 87%?

Such a limit would be completely arbitrary, and wouldn't take account of an individual's own circumstances. It is surely down to the lender to look at the borrower and ascertain the maximum amount they are willing to lend to that customer, not to have a random limit imposed on it from above.

I still don't think there is anything wrong with higher loan-to-value lending, so long as it is done properly - i.e., to people that can definitely afford it. And borrowers have to be completely, 100% clear on the risks they are taking, particularly regarding negative equity.

It would be staggering to think that the FSA has actually listened to those involved with the mortgage market, and taken their advice on where regulation needs to be improved. And getting rid of the appalling fast-track model, which has been completely abused for years, on the FSA's watch, is a far more sensible place to start than with some daft, arbitrary limits on how much they can lend.