Mortgage Zombie Rules U-Turn Needed

Mortgage Zombie Rules U-Turn Needed.

The Mortgage Market Review (MMR) rules started on 1 April 2014 (April Fools Day???).

In summary, new mortgage lending rules imposed by the finance industry regulator, the Financial Conduct Authority (FCA), require both mortgage lenders and mortgage brokers to fully assess a client’s needs and requirements for a mortgage but also to strictly assess affordability i.e. the ability to be able to continue to meet monthly mortgage payments.

In addition, the affordability test must also include stress testing if interest rates go up by say 2% or 3% or if a client does not receive pay rises or indeed suffers a change in income.

MMR was supposed to create a more stable environment for the mortgage market to prevent the fiasco of bank collapse due to toxic mortgage debt and poor lending.  In addition, it was supposed to create more responsible lending and a stable house prices market.

In the ‘old day’s there was an array of easy credit mortgages:

• 100% loan to value mortgages
• 125% loan to value mortgages
• Self-Certified mortgages where the borrower simply confirmed their income without the need to prove it popular with business owners who’s income fluctuates or were paid by a combination of income and dividends
• Mortgage lending multiples of, in some cases, up to 10X income
• Adverse Credit mortgages for people with perhaps a credit problem, that may not have been their own fault

These days are now history and certainly not all of the above was sensible e.g. 125% loan to value mortgages – lending more than the property is worth is just madness.

What is the impact of MMR?

Mortgage Zombies: people who are trapped with their current mortgage or in their current property.

MMR has created a huge raft of people trapped in mortgages that they cannot escape from.  Mortgage lenders are very strict now on what and who they will lend to.

The adverse credit mortgage market is virtually non-existent.

High loan to value mortgages are difficult to come by.  Even the Government has had to step in with the Help to Buy Deposit Scheme and Help to Buy Mortgage Guarantee Scheme. They are now even considering a “Help to Build” scheme.

Self-Certified mortgages are banned.

Interest Only mortgages are banned for residential mortgages but still available for buy to let investors.

Linda Woodall, Director or Mortgages and Lending at the FCA, suggested at the Council of Mortgage Lenders Annual conference this week that she was disappointed that mortgage lenders were not being more flexible as part of a transitional process from previously flexible mortgage lending to the new, more regimented and controlled approach to mortgage lending and affordability.

Comment

The FCA appears to now be back tracking but lenders and mortgage brokers are fearful of huge fines for poor lending practices.  Indeed, seemingly every day another lender is cited and fined.  There is a conflict of interest here:

• Lenders need to protect themselves from financial collapse
• The FCA appears to want it all ways, strict but not so strict lending but they will fine you if they change their minds down the line

A balanced solution needs to be found.

MMR has created a trap for those people that are not “Mr & Mrs Average” as typically, for fear of fines, bank and building society staff cannot make individual underwriting decisions on a mortgage case, they use a computer generated model, controlled from the centre for compliance reasons and invariably “the computer says No!” 

So people that previously made use of more flexible lending, no longer can and are locked into their current mortgage or cannot even think about selling to buy a new home because they cannot be sure they will get a mortgage.   In some cases, people are simply looking to downsize but under the new affordability tests, they are automatically deemed to not be able to afford the new, lower mortgage, despite the fact that they have been paying the higher mortgage rate for years.

A rethink of MMR we suggest is required of the FCA.  Clearly, after just over 6 months of MMR, it is not working.  There are sound elements within MMR regarding affordability but the FCA needs to give both lenders and mortgage brokers some guidance on being more flexible when assessing income, affordability or past poor credit history.