Are Self Cert Mortgages About to Die?
In what has developed into a blaze of media speculation, there is now widespread anticipation that the Financial Services Authority will soon ban Self Certified Mortgages from the UK home buying market. Fears are also growing over the likelihood of similar announcements to tighten the regulations for buy-to-let and other landlord, property investor and self-employed mortgage applications.
The financial industry watchdog has been examining the impact of self-certified mortgages for quite a while and many have been expecting a curb on their availability. An outright ban, which seems evermore certain, may however come as quite a shock to the market, when the FSA releases its judgement next week.
Otherwise known as ‘liar loans’, the self-certified mortgage has received widespread criticism and it has even been partly blamed for the financial lending market falling into disrepute. In fact, in my opinion, the product itself is not at fault – the problem lies squarely on the shoulders of those lenders who fail to administer applications in a diligent and cautious manner. Self-certification loans are very useful to the self-employed, who for various reasons cannot always offer immediate proof of their income. However, lenders have frequently failed to follow-up the applications by gathering the necessary evidence of income claims made.
In the end, many mortgages have been granted to unsuitable borrowers or to those that were clearly always incapable of meeting the onerous repayment schedule. In some cases, applicants have exaggerated their income or made unfounded claims of income sources, just to acquire a property loan. If the lenders had bothered to check the facts, they would have identified the anomalies and withdrawn the offer of a mortgage completely.
The high volume of bad debt loans resulting out of self-cert mortgage advances has been used as a reason why banks and other financial institutions have themselves fallen into disastrous levels of debt. Some have suggested (not entirely without evidence) that self-cert mortgages are one of the main reasons why the credit crunch occurred.
The FSA itself has so far declined to comment on the speculation that self-certified loans will be outlawed. It intends releasing a report on its review of the mortgage market next week, but even the head of its own retail market division suggested earlier in the year that providing self-cert mortgages to the self-employed was probably a mistake. He also added that all mortgage applications should have enforced income verification, before consideration over a loan advance is made. The ring of the death-bell for this particular product seems to have become louder with each passing week since then.
A ban by the FSA will probably affect the availability of other similar styles of mortgage including fast-track and buy-to-let. These have in any event substantially reduced in volume over the last year, as many will already know. Of course, many property investors had hoped the number and range of useful buy-to-let and fast-track products would increase, once the credit crunch subsided – but this seems unlikely, if the FSA goes ahead with its anticipated ban of self-certification products.
As if to underline this point, there are currently only two self-certification mortgages surviving on the market. Both are from Platform, which is an intermediary of the Co-operative Bank in the UK.
In defence of self-cert loans, the influential Council of Mortgage Lenders has come out of the shadows saying it believes the product has a valid niche for those applicants that cannot verify their employment income or have unpredictable or irregular income. It has suggested that tighter control or more robust verification of applications is really more appropriate than an outright ban. It has added that removing these products from the shelf may actually produce disastrous knock-on effects, drying-up even more the already desperate drought of mortgage availability. In consequence, the ban could extend the credit crunch and obstruct any impending recovery of the housing market.
Buy-to-let is another problem area for the FSA, as it believes loans have often been granted to unsuitable applicants or in cases where the gap between rental income and mortgage repayments was far too tight. The explosion of buy-to-let in our major cities has undoubtedly contributed to a perilous oversupply issue, resulting in many properties standing empty and some landlord investors facing imminent repossession of their properties. Rent levels have fallen and void periods have increased, which has presented landlords with major financial problems, because they simply cannot afford to meet mortgage repayment schedules.It is expected the FSA will tighten the regulations that govern buy-to-let, with more emphasis on reducing the allowable size of a loan when compared with the rental income a property is expected to generate. Market analysts also believe the FSA will make accessibility to buy-to-let mortgages far more difficult for inexperienced landlords and those without an adequate financial reserve or alternative income source.