CML news & views

Last week’s announcement by the intermediary lender Platform could be the death knell for self-certified mortgages in the UK.

Platform, the last main provider of self-certified loans, said it was withdrawing from the market immediately. In doing so, however, it stressed that existing borrowers would not be affected by the decision. Their accounts will continue to operate as normal. 

The firm argued that the Financial Services Authority’s (FSA) stance on self-certified lending – outlined in its recent mortgage market review paper – now rendered the market “unfeasible.”

It said it understood FSA concerns and fully supported the aim of improving transparency in the industry. But it added: “We continue to believe that the industry must recognise that self-employed people can have different circumstances and may not always be able to provide the normal proof of income documentation required.”

It continued: “As a lender which prides itself on financial inclusion, Platform remains committed to supporting self-employed people and will now work with the sector with a view to developing a new product that meets the FSA’s guidelines.”

Those sentiments will be echoed by other lenders that have sold self-certified loans in the past – and want to be able to sell them in the future – to those borrowers for whom they were designed: the self-employed and contract workers.

More recently, however, self-certified mortgages have been dubbed “liar loans” in some sections of the media. And before the onset of the credit crunch, some lenders undoubtedly did relax their underwriting standards to a point where some intermediaries could help their clients commit fraud by lying about their income.

A clear case?

Platform’s announcement came shortly after the FSA asserted in its recent paper that there was a “clear and non-controversial case” for regulating all loans where the income of the borrower is not verified. 

We accept that there is indeed a clear case for some kind of intervention. But it would be wrong in the view of lenders – and have unintended consequences for many consumers – if income verification was a requirement for all loans.

In arguing the case for a ban on both self-certified mortgages and those which lenders choose to “fast track” through their processing systems, the FSA has raised concerns within the industry that it is planning to outlaw loans that are at opposite ends of the risk spectrum. 

Fast tracking is, of course, not a product feature, but a process that some lenders choose to apply to low-risk loans, usually taken out at low loan-to-value and/or loan-to-income ratios by customers with excellent credit ratings.

The vast majority of fast-tracked loans have performed well and do not require tighter regulatory controls, which would raise the cost of processing mortgages for all borrowers.

Balancing risks

It is clear that in a mortgage market with more than 11 million customers, all loans will not have the same level of risk. Lenders’ pricing and processing need to reflect this. And while most firms have struck the right balance in the past, some have suffered losses through insufficient regard of lending “basics.”

So, while self-certified mortgages may be more risky than other types of lending – and may therefore have higher levels of arrears as a result – that does not, in itself, constitute a case for banning them completely. 

The FSA may be determined to press ahead with a ban. But we believe the key is to ensure that any mortgage product is sold to the right type of borrower, and that the risks are properly understood by customers and reflected both in the lending decision and the pricing of the loan. 

Understanding consumer detriment

A loan that temporarily goes into arrears is not, in itself, evidence of consumer detriment. A mortgage may have been affordable at the outset and lent responsibly to a borrower who then suffers a change in circumstances and a reduction in income. The causes for most people who get into mortgage difficulty are well documented: loss of a job or income, sickness and divorce.

But if a borrower is subsequently able to get back on track, pay off his arrears and successfully buy a home over 25 years, that is a better outcome than denying him access to home-ownership by any means. Or assuming that being a tenant at risk of eviction for not paying his rent is a better option. It isn’t.

There may be less justification for an employed borrower with a conventional income stream to consider a self-certified mortgage. But banning this option for all self-employed borrowers looks like a blunt instrument – particularly in a world in which employment patterns are changing. 

A ban on self-certified borrowing will also be detrimental to existing borrowers, who will find that mortgages become more expensive, more restricted or simply unavailable as a result of the FSA’s intervention.

The challenge for lenders

We accept that we have to demonstrate better regulatory controls that the FSA could adopt as an alternative to the blunt approach it is proposing.

The regulator’s proposal for a ban on all lending where income is not verified will impose unnecessary, additional cost and delays on low-risk customers whose loans may be fast tracked by the lender because their payment history is good. The proposal may be well-intentioned, but the practical outcome will be more expensive mortgages.

Some lenders estimate that up to a half of their mortgages are low risk, involving customers with a high credit score and borrowing at a loan-to-value ratio of less than 50%. 

Forcing lenders and borrowers to verify income in all these cases is an unnecessary burden for everyone involved. Customers would end up paying more – and having to cope with greater administration and delay themselves – for no tangible benefit.

There is a better way, and we will highlight our counter-proposals when we respond to the FSA’s discussion paper next year.