The Financial Services Authority (FSA) announced plans to prevent a return of the risky mortgage lending seen in boom times, by ensuring that common sense standards continue to apply in future.
The Mortgage Market Review aims to prevent a recurrence of the irresponsible lending which resulted in some borrowers taking on mortgages which only seemed affordable on the assumption that house prices would always rise. Many of those borrowers ended up struggling to repay their mortgage and in danger of losing their home.
Following consultation, the FSA Board will make a decision on the final form of rules in summer 2012, but implementation will not be before 2013.
At the core of the proposals are three principles of good mortgage underwriting:
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Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability.
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This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.
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Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.
Lord Turner, chairman of the FSA, said: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return."
The consultation is open until March 30, 2012.
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