FSA Proposes to Ban High Risk UK Self Certified Liar Mortgages, Housing Market Impact
Housing-Market / UK Housing Jul 15, 2010 - 01:45 AM GMTBy: Nadeem_Walayat
The FSA has announced a crackdown on high risk mortgages as data shows that self certified loans still amount to over 40% of all mortgages, which is at a similar percentage level to the pre housing market crash days. Self certified mortgages as the the name suggests are mortgages where borrowers are not asked to provide proof of stated earnings and which are commonly termed as liar loans in the U.S. that led to the subprime mortgage market boom and bust.
FSA Key Proposals to Ensure Borrowers are properly assessed and can afford loans -
- Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
- Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
- Extra protection for vulnerable customers with a credit-impaired history
FSA Analysis of UK Housing Mortgage Market Findings -
- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
- Borrowers with a credit-impaired history are particularly vulnerable.
Lesley Titcomb, FSA director responsible for the mortgage market, said: “There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.
“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”
Today's report also includes the key findings from the FSA's review into arrears charges, which indicated significant variation in the level of arrears fees across the market.
The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears. The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.
The fact of the matter is that the FSA was asleep at the wheel during the boom and bust that began 3 years ago. The FSA now proposes tighter regulation, but that does not mean anything significant will actually be implemented. Therefore we can disregard the FSA's intention to regulate the mortgage market in the near future for three reasons -
1. The FSA is going to be eventually scrapped / reformed for failing to regulate the financial sector.
2. That the credit markets are tight and the return to boom times is not on even the distant horizon, therefore the market is already operating under tight loan requirements.
3. The FSA statistics on over 40% of self certified liar loans may be inaccurate as it includes fast track loans of those with high credit scores and low loan to value high deposit borrowers.
The net result is that the FSA consultation paper just amounts to hot air that is expected to have little impact on the UK housing market over at least the next few years. The current consultations processes takes the FSA into Mid November 2010, it remains to be seen what actually follows this process by early 2011.
However looking several years down the road beyond 2011, at a time when the the housing market may be recovering any actual tightening in the regulatory rules on self certified loans would have the effect of slowing the housing market trend down, as lenders would need to take the time to ensure that potential borrowers could actually afford the loans, thus suggests more measured market sentiment and trend as lenders are forced to stick to within tighter lending criteria.
This analysis is part of an on going series that will culminate in a multi-year UK house prices trend forecast by Mid August 2010 that will seek to more than replicate the original 2 year bear market forecast of August 2007 made right at the very peak of the UK housing market (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), which also builds up on the 100 page Inflation Mega-Trend Ebook of Jan 2010 (Free Download Now), which contained the following UK housing market analysis (updated graph):
UK Housing Bear Market Election Bounce
The UK housing market peaked in August 2007 and entered into a 2 year bear market exactly as forecast at the time (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), analysis which projected towards a fall in UK house prices from August 2007 to August 2009 of between 15% and 25% that has subsequently came to pass as UK house prices bottomed in March 2009 after having fallen by 23% from the 2007 peak.
The UK housing bear market has experienced a strong bounce off of the March 2009 lows and now stands up approx 10% off of the low as a consequence of unprecedented measures as mentioned in this ebook, the Labour government has succeeded in temporarily bringing UK house price falls to a halt and triggering an Election Bounce.
The impact of the inflation mega-trend on the UK housing market will be for UK house price to be supported in nominal terms, however this it does NOT ignite the feel good factor that triggers housing market booms which only follow when house prices begin to significantly rise in REAL terms i.e. after inflation.
Whilst the current corrective bounce looks set continue into the middle of 2010 (allowing for a potential one month blip as a consequence of the bad January weather), this rally is still seen as a correction within a housing bear market that is expected to remain in a depression for many years, before house prices succumb to the effect of the inflation mega-trend and start to rise.
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Source: http://www.marketoracle.co.uk/Article21112.html
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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