One for Hamish

Graham_Devon

The Financial Services Authority has made a key concession to lenders by admitting that its rules on how homebuyers should be assessed for a mortgage may be too stringent.

In its annual business plan, the FSA acknowledged that its proposal that lenders should look at whether a customer can afford a mortgage over a 25-year period "may not be appropriate given the range of individual circumstances".

The regulator, which has faced intense lobbying from the industry, also stressed that it did not intend to ban interest-only loans.

"The FSA nevertheless remains focused on ensuring that the new regime includes a robust assessment by the lender of the affordability of the loan for the individual, both for interest only and repayment loans," the regulator said.

I say one for Hamish, as it's hardly a point scored for, what are classed as "the bears".

However, I have to say, it's pretty amusing that looking to see whether someone could actually afford a mortgage, over the mortgage term is seen as innapropriate!!

http://www.guardian.co.uk/business/2011/mar/22/fsa-mortgage-affordability

Graham_Devon

Slighty more amusing is they recently fined DB mortgages for:

The FSA said DB Mortgages failed to look at whether there were cheaper deals available for customers seeking self-certified mortgages, failed to show that customers could afford mortgages where the term continued into their retirement, and failed to make sure customers with an interest-only mortgage had thought about where they would live if they had to sell their house to pay off the loan.

HAMISH_MCTAVISH

Graham_Devon wrote: »

I say one for Hamish, as it's hardly a point scored for, what are classed as "the bears".

Well that bit's true.

However, I have to say, it's pretty amusing that looking to see whether someone could actually afford a mortgage, over the mortgage term is seen as innapropriate!!

But that bit is not.

The Guardian has been rather naughty...... The report does say that the mortgage should be affordable over the term. Just that the term need not be 25 years.;)

Loughton_Monkey

Matters not one wit whether they can afford it or not. Just so long as there's still enough equity in it by the time they have reneged on the payments and you've had time to kick them on the streets.

Something to be said for issuing, say, a 4% mortgage over 25 years on condition that they physically pay something equivalent to 6%. The extra would physically reduce the balance, but would build up a compulsory 'buffer' to ease in any future rate increases.

System

Have they ever published the full set of "rules" to the normo's like us?

shortchanged_2

Shame the FSA isn't planning a cull on IO mortgages though.

FTBFun

shortchanged wrote: »

Shame the FSA isn't planning a cull on IO mortgages though.

Why would they need to?

shortchanged_2

Because they cause no end of trouble from endowments not maturing enough to cover the capital, to people having no repayment vehicle in place at all to pay off the capital.
Unless the banks are VERY strict with how they give out IO mortgages, i.e they know someone can definately pay off the capital at the end of the term then they sould not grant them.

They also in the past have helped fuel rampant HPI as they have given some people the false impression a property is affordable to them when it actually isn't.

julieq

Joeskeppi wrote: »

Have they ever published the full set of "rules" to the normo's like us?

The discussion document is online, and has a lot of interesting material on mortgages in the UK. As I recall it does make the point that the crisis was generated overseas but called into question UK practices where they combine, so that in general lending is well controlled but that risk is multiplied when you combine for example self certs with offset mortgages. Not that either is intrinsically risky or an indicator of default, it's just that there is a higher tendency to marginal issues and that the combination of two or more risk areas is a good indicator of default.

It's easy enough to find via google. It's not a bad document but it was answering a specific question at a time when the FSA was under severe criticism so arguably starts from a defensive position.

quantic

I'm amazed by the number of people who have taken out IO mortgages not understanding that they are not paying off any capital, one of my co-workers was laughing at me for getting a repayment, saying that an IO is much cheaper. When I explained to her that she would never own her property no matter how long she kept making payments she was confused. I'm not sure what she thought IO meant, but she certainly didn't think it meant what it does.

I would be for banning IO mortgages, in my limited experience (family, friends and co-workers) people simply take them out because they are cheaper than repayment, with nothing in place to actual pay of the capital at any point. Others just see it as renting but you can decorate which is pretty hilarious

julieq

Most of the people with an endowment shortfall borrowed in the late 1980s. The shortfall is petty cash in today's terms.

There's nothing intrinsically wrong with IO mortgages. Worst case you come to the end of the 25 years having paid substantially less than someone renting over that period and owning no house. You would be doing spectacularly badly in historic terms not to be sitting on a big chunk of equity too. It's a more savvy strategy generally to take an IO mortgage and use the cash savings elsewhere than to sink money into bricks and mortar. Not that that means that people don't understand what they're doing in some cases, obviously.

The FSA do point out though that in combination with other risk factors IO mortgages can be an indicator of default risk increasing.