Mortgage Market Review.

LATEST UPDATE 
The Network response has been submitted to the FSA within the required timeframe of 30 March 2012 and the next update from the FSA will be in the summer time. We'll of course update you as soon as we get some news. In the mean time, read Stephen Smith's latest article in Mortgage Solutions - A road to nowhere for mortgage prisoners.

 

The latest, and possibly the last consultation document from the FSA on the UK mortgage market was published just before Christmas, on Monday 19 December. Entitled, “CP11/31 Mortgage Market Review: Proposed package of reforms”, the core document runs to over 260 pages, with a larger number of pages in the appendices and the data pack.  

Legal & General Network has a Working Party already established to review and analyse this paper. Over the course of the next three months, we’ll be developing our Network response to the questions the FSA has posed and will be starting to plan for the changes to systems, processes and procedures that may be required for our Network mortgage sellers. The closing date for the consultation is 30 March 2012. No changes are anticipated to the way intermediated mortgage business is carried out until 2013 at the earliest.

The FSA has maintained its objective of delivering a mortgage market which is “sustainable and works better for all participants”, and makes it very clear that whilst much of the poor practice which existed in the market during the period 2005 to 2008 has since largely disappeared, they want to ensure that poor practice amongst lenders and intermediaries never happens again, in whatever part of the market cycle.
There’s a good deal of detail to be sifted through, and this is a real consultation rather than an imposition of new rules, so what is set out here may change before finally being set into regulation, but the main headlines of CP 11/31 are as follows:

• Income will have to be verified in every mortgage application – bringing an end to both self-certification and to fast-track mortgage products.
• The rules for determining disposable income, to support affordability, are less prescriptive than originally proposed, but guidance on what lenders should consider is provided.
• Lenders will have to decide on the “stress test” they wish to apply, to check that mortgage applicants will be able to afford the payments should interest rates rise.
• Interest only mortgages will still be permitted, but lenders will have to satisfy themselves that the borrower has a credible strategy to repay the capital at the end of the term.
• The vast majority of sales will have to be carried out on an advised basis – all sales where there is human interaction, face to face, phone or e mail, will have to be advised.  Only internet and postal “execution only” business for “high net worth and professional consumers” will be permitted.
• Certain mortgage applicants who pose a higher risk to themselves, such as those consolidating debts, will have to get explicit advice.
• And there will be special transitional rules for borrowers caught by changes in rules – the so called “mortgage prisoners” – and both their existing lender or a new lender can apply transitional rules to ensure they’re not disadvantaged if they wish to move home or remortgage.

So some of the most contentious of the original proposals made a couple of years ago, such as the imposition of loan to value or loan to income caps, or the restrictions on the release of equity at the time of a home move have not been included in these final proposals. Nor is there any additional exam qualification needed for mortgage advisers or any changes to the descriptive labels which firms can use. The Initial Disclosure Document is made optional, although it is believed that most advisers will still make some form of written service disclosure, and there will be some changes to the trigger points for the production of a KFI.

Mortgage intermediaries will, as proposed in an earlier consultation document, be responsible for ensuring that their mortgage applicants fit the published criteria of the lender, but will not be responsible further for proving affordability.

At first reading, CP 11/31 seems to be a well reasoned and pragmatic set of proposals, much influenced by the lobbying work and responses from the intermediary and lending industry. With no major rule changes anticipated until 2013 at the earliest, we seem to have ample time to consider these proposals and plan for the changes we’ll need to make to how we go about our business.

Legal & General will produce further briefing notes on CP11/31 over the next few months. Any comments on this note, or suggestions for our response to the paper should be sent to mortgageclubmarketing@landg.com

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