Self-certified mortgages should be banned, says FSA chair … and maybe bonuses, too


Jill Treanor and Jill Insley Wednesday 14 July 2010 


Britain should consider restricting the flow of loans to households and businesses to create a more stable economy, the top City regulator said tonight as he prepared to clamp down on the mortgage market by banning “self-certified loans” used by the self-employed.


Lord Turner, chair of the Financial Services Authority, signalled a significant change in the approach to regulating loans, and particularly mortgages, by publishing a consultation paper that proposed requiring verification of a borrower’s income in every case, to prevent over-inflation of income and mortgage fraud.


Turner set out a case for structural reform to tackle the issue of credit that had become too easily available during the boom and too hard to obtain in the bust.Having once lamented that parts of the financial system were “socially useless”, he is also against City bonuses.


Large bank bonuses for selling over-complex and risky products of little real use to humanity were a major problem, and we need remuneration practice and regulations which make excessive risk-taking less likely in future,” Turner will tell the Future of Finance conference in London tomorrow. “[But] if we only address banker bonuses and not the fundamental drivers of credit supply instability, we will not adequately reduce the probability of a repeat performance.


“The central issue is volatility in the availability of credit, first too easily available at too low a cost, then constrained in a credit crunch.” The FSA’s consultation proposes imposing affordability tests for all mortgages, making lenders ultimately responsible for assessing a consumer’s ability to pay, and preventing the use of interest-only loans to enable borrowers to cope with a mortgage they could not otherwise afford.


The FSA analysed lending decisions, looking at the causes of arrears and repossession since 2005, and found that 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income. Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income.


The FSA has stepped back from an idea raised in the mortgage market review discussion paper last year to set a maximum loan-to-value ratio on mortgages. Such a move would have ended mortgages worth 100% of the property’s price.


But Turner, in a speech to the British Bankers’ Association today, also asked questions about the consumer protection and markets agency that the government plans to replace some of the functions of the FSA, others of which will go to a new subsidiary of the Bank of England.


Turner asked whether the new body should be able to ban specific products as “inherently undesirable”, saying its creation of the body should provide a “major opportunity” to debate the choices.


He said that while society had seemed happy with free credit during the boom, it was time to reconsider. “We are signalling a significant change away from that approach, but the shift is not a purely technical issue which can be left to technicians; it is a social and political choice which should merit extensive debate.”


Stephen Green, chairman of HSBC, appeared to endorse the idea, backing new powers for the Bank of England’s financial policy committee, allowing it to cap the size of loans to mortgage customers.






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