CML news & views

We have no objection in principle if local authorities want to carry out more mortgage lending, as mooted by council leaders last week. However, we believe that if the government moves to allow local authorities to offer “targeted deals to the public” – as requested by council leaders – it should also ensure that any loans that are offered are regulated by the Financial Services Authority (FSA).

Since it was introduced in 2004, the statutory regulation of mortgages by the FSA has imposed significant costs on lenders and, ultimately, their customers. But the rules have also provided protection for borrowers, enabled them to compare products more easily and underpinned consumer confidence in the mortgage market.

We believe that there should be a level playing field of regulatory requirements for all those active in the mortgage market, whether they are private firms or local authorities. Any gaps in regulation would be confusing for consumers and could potentially damage confidence in the market.

But as long regulatory standards are upheld across the board, we have no objection to councils offering mortgages. 

In a letter published in The Times last week, council leaders pointed out that, in 1980 – during the heyday of the Right to Buy – local authorities had around 600,000 mortgages on their books. The letter claimed that councils were currently “well placed to take a judicious share of mortgage business.”

While we believe it is for councils themselves to decide how much FSA-regulated mortgage lending they wish to undertake, there are a number of points that they will need to bear in mind:

• The need to ensure that any borrowers in arrears are treated fairly. FSA rules would, in any case, require councils to uphold the treating customers fairly (TCF) requirements for borrowers. But it would be difficult, for example, for councils to balance their desire to extend forbearance to borrowers in difficulty with the interests of council tax payers who may, in effect, be asked to write off any mortgage arrears that are not paid.
• The need to lend prudently and to make an accurate assessment of the creditworthiness of borrowers. Council leaders argued that, in the face of “evaporating mortgage availability,” there could be “a pragmatic need for the local public sector to step in and offer much-needed new mortgage capacity.”  But could it be justified to underwrite with public funds loans made to borrowers who have been unable to get a mortgage from a conventional lender, perhaps because they represent a credit risk?

Councils offering mortgages now could also end up with a long-term legacy for trying to deal with what may be a relatively short-term problem. Councils may end up administering for many years to come a relatively small number of mortgages advanced to help borrowers who are currently being constrained by the credit crunch.

We agree with the council leaders that intervention by local government to help support home-owners may be a sensible step. But instead of, in effect, seeking to build new mortgage businesses from scratch – and dealing with all the problems of funding, designing products, valuation, assessing the creditworthiness of borrowers, and mortgage administration – it may be more fruitful for councils to build on initiatives to promote low-cost home-ownership, shared equity and mortgage rescue.