The Financial Services Authority (FSA) and the lenders and intermediaries in the mortgage market are closer to establishing a workable set of guidelines with an emphasis on affordability and solid underwriting standards.
Lenders, not brokers, under the proposed guidelines, assume the role of assessing whether a consumer qualifies for a home loan. Credit is issued only under the circumstance when a borrow demonstrates a strong probability of meeting payments without dependence on rising housing prices.
Future fluctuations in interest rate are also considered when determining affordability. Borrowers are discouraged to enter agreements where they assume low interest rates will exist infinitely.
Customers who undertake interest-only mortgages must prove credible resources to meet the repayment schedule as well, outside of considering potential rising property values.
The institution is also working on establishing guidelines for business owners who raise capital via home equity loans to fund their entrepreneurial ventures.
Chairman of the FSA, Lord Adair Turner, believes these measures ensure enhanced lending practices in the future when memories of the past crisis fade and the temptation to engage in more risky credit practices reappears.
The FSA encourages the implementation of these new guidelines for 2013, enabling them to be established prior to future growth in the economy.
Mortgage industry leaders like Paul Broadhead at the Building Societies Association believe these measures protect the consumer, while also giving lenders proper discretion in determining credit-worthy customers.
Others remain skeptical, like Charles Haresnape, managing director at Aldermore Residential Mortgages, who is concerned why intermediaries have been given a pass to determine affordability in giving counsel.
Grenville Turner, chief executive of Countrywide, favors the measures to clarify which party is responsible for determining affordability, but he thinks the timing of the new standards is questionable.
He fears that the current market climate inhibits 39 of 40 potential customers from qualifying for mortgage loans. To prevent further market sluggishness, he argues lenders need to become more flexible in assessing affordability for new applicants notwithstanding a solution for the self-employed and current homeowners trapped in negative equity.
The timing aside, the FSA seeks ways to facilitate the process for consumers navigating the mortgage application process. To reduce a daunting abundance of information, the organization has streamlined its prescribed disclosure requirements for lending institutions. These entities are mandated to share 'key messages' with the potential customer at the appropriate time, instead of using the Initial Disclosure Document (IDD).
Independent firms, according to the new FSA guidelines, are no longer mandated to offer their customers a ‘fee only' option. They must disclose to consumers whether they are mining direct-only agreements. Should these intermediaries desire to propose a direct-only deal, the FSA wants to eliminate the mandate to disclose a Key Facts Illustration, thereby streamlining the process for the intermediary.
In addition, lending firms must consider whether rolling fees into a credit agreement is suitable. Should the customer desire this method, the lender must move forward with the loan in this matter.
For non deposit taking institutions, the FSA seeks to implement capital requirements for these types of lenders. Non-bank institutions must abide by a more risk-based criteria, where the capital requirement is augmented. Subsequently, these firms will have to establish protocols and controls to manage their liquidity risk judiciously.
The FSA seeks to streamline processes for niche markets in lending as well, thereby galvanizing the entire industry. Under consideration are equity release products like lifetime mortgages and home reversion plans, high net worth lending, sale and rent back, home purchase loans, business lending and bridging finance. The FSA desires to establish clear guidelines for the niche markets as it does in the conventional mortgage arena, ultimately providing a consistent, straight criteria for its affordability standards, income requirements and other pertinent factors in determining credit worthiness.
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