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CML responds to FSA mortgage review and calls for government emphasis on funding

Published: 28 January 2010

In two new separate but parallel policy papers, the Council of Mortgage Lenders today expresses support in principle for some of the regulatory reform proposed by the FSA under its mortgage market review. At the same time, the CML believes that such reform needs to be accompanied by a clearer government strategy in relation to mortgage funding. Conduct of business reform may be effectively irrelevant for the foreseeable future if the mortgage market shrinks due to unaddressed structural vulnerabilities in the mortgage funding markets.

The CML’s two new major documents consist of a formal response to the FSA’s Mortgage Market Review discussion paper, and a detailed report on the outlook for mortgage funding markets in the UK over the 2010-2015 period.

The CML sees a crucial link between the two issues:

  • The loss of investor confidence in wholesale debt markets left a £300 billion funding gap that has only been filled on a temporary basis by government funds under the special liquidity and credit guarantee schemes. These schemes expire between 2011 and 2014, leaving uncertainty about how far, and through what sources, lenders will be able to refinance this funding.
  • Retail deposits will not be large enough to fill the gap. But the government has not yet recognised the need for a strategy to put mortgage funding markets back on a sustainable footing. Unless it does so, the likelihood is that the mortgage market will shrink. This would make significant conduct of business reform by the FSA largely irrelevant for the foreseeable future.

CML director general Michael Coogan comments:

"The CML believes that any conduct of business reform needs to go hand-in-hand with a strategic plan to achieve diversified funding for mortgage lenders, of all types.

 "The FSA’s planned reforms are well-intentioned, even if their implementation is a source of concern. But there is a real risk that they may be at best irrelevant, or at worst may damage a fragile market at the wrong time, unless they are accompanied by a strategic plan to achieve and sustain stable mortgage funding markets for the future. We call on the Treasury today to make this plan of action a high priority.

"In specific areas, the FSA is over-reacting to recent events without a clear evidence base. The proposal to require income verification in all cases, and so prevent fast-track processing, is an example of this. The FSA needs to moderate its approach to ensure that regulation does not layer in worthless additional cost, or have the undesirable side-effect of creating financial exclusion among swathes of borrowers who may be perfectly able to sustain a mortgage commitment."

Response to the FSA’s mortgage market review

Highlights of the CML’s detailed response to the FSA’s mortgage market review consultation are:

  • The CML welcomes the FSA’s reform agenda to enhance its supervision. By being a more intrusive regulator, paying more attention to market “outlier” firms or products, the FSA is already re-shaping the financial services market.
  • While the CML agrees in principle with a number of the FSA’s proposals, it is questionable whether further mortgage conduct of business rules (beyond the arrears and approved persons changes already under way) are actually needed.
  • The FSA justifies intervention with reference to the “major economic distress” experienced by some borrowers, while recognising that the market has worked well for the vast majority. But the CML believes the reforms proposed would not deal with the major causes of distress – particularly the use of multiple credit (not just mortgages), ill-timed property purchases, or changes in financial and personal circumstances.
  • The cumulative effect of the prudential reforms already under way may have a significant impact on the lending market, but this has not been analysed or quantified and the CML believes this is a necessary step before deciding on what conduct of business reform should occur.
  • The cost/benefit analysis for proposed reform is based on a market that has recovered, rather than the market as it is now. This is potentially damaging, as it does not take account of the need to ensure that regulatory change is timed to ensure that it promotes market recovery.
  • The CML provides evidence that arrears levels on “fast track” business do not justify a requirement of income verification in all cases. Its response includes a proposal that would allow the continuing use of fast track with appropriate safeguards.
  • The CML agrees that lenders, rather than intermediaries, are ultimately responsible for assessing affordability. But more work is needed to define the respective responsibilities of lenders and intermediaries, and the FSA should not prescribe a single affordability model, as this would be disproportionate and inflexible.
  • The CML favours the idea that all intermediary mortgage sales should be on an “advised” basis.
  • The CML suggests that, to address the perceived problem of “irrational” borrowing, higher risk borrowers should potentially be given money guidance before making mortgage decisions.

Outlook for the funding markets

Highlights of the CML’s paper on the outlook for the mortgage funding markets between 2010 and 2015 are:

  • Functioning private sector wholesale funding markets are needed to allow the government to withdraw its funding support. Retail deposits alone will not be sufficient.
  • UK government policy measures have focused on bank capital and liquidity, and on tightening mortgage market regulation. There has been no focus on identifying or developing a sustainable funding model for the UK mortgage market going forward.
  • Securitisation, wholesale funded lenders, and non-conforming mortgage credit are essentially seen by policymakers as problematic because of the events in the US. But in the UK, residential mortgage backed securities have performed well, despite an absence of government support.
  • The focus of government support on retail deposits and senior unsecured bonds from banks and larger building societies, with no sign of real support to RMBS and covered bond markets, is distorting the competitive landscape and risks exacerbating moral hazard.
  • A clear government strategy is needed to plan for sustainable mortgage funding markets, balanced in its impact on retail deposits, senior unsecured bonds, residential mortgage-backed securities and covered bonds, as well as between different types of financial institution – banks, building societies and non-deposit takers.

 

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