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FSA toughens mortgage lending rules

Posted on October 19th, 2009 by admin

Watchdog expected to ban self-certification mortgages and force lenders to carry out rigorous checks on people’s incomes in new rules to be set out today

Homebuyers applying for mortgages will have to prove their ability to repay them, under new rules to be unveiled by the UK’s financial regulator today.

In its reform of the mortgage lending industry, the Financial Services Authority (FSA) is expected to force banks and other lenders to carry out rigorous checks on people’s incomes before granting a mortgage, such as examining their spending habits and existing loans.

The watchdog is also expected to ban self-certification mortgages, where borrowers do not have to prove their income.

But the FSA has rowed back from imposing caps on loan-to-value or loan-to-income ratios and a ban on 100% mortgages, opting instead to crack down on risky lending, for example by forcing non-bank lenders to hold on to 5-10% of the loans they originate.

At the weekend, Gordon Brown pledged to end “reckless” banking practices in the City, saying the “much tougher rules” would protect voters.

“I’m determined to end the reckless banking practices that have left so many of you worried about your household budgets,” the prime minister said in his latest webcast.

“So to give you a better deal we are taking extensive action to reform the whole culture of the financial sector and to protect and empower you, the consumer. I believe lenders should have to carry out proper checks on incomes before agreeing home loans.

“And to protect homebuyers further, we need much tougher rules to make sure that high loan-to-value or high loan-to-income mortgages are offered only when the lender has done rigorous checks to ensure people can keep up repayments.”

FSA chairman Lord Turner said in March that the rapid growth of mortgage lending was a key factor in triggering the financial crisis. He added that the high loan-to-value ratios and high loan-to-income ratios advanced to borrowers by lenders had played an important role.