By Maximilian Clarke

The Financial Services Authority (FSA) today announced plans to prevent a return of the risky mortgage lending seen in boom times, by ensuring that common sense standards continue to apply in future.

The Mortgage Market Review aims to prevent a recurrence of the irresponsible lending which resulted in some borrowers taking on mortgages which only seemed affordable on the assumption that house prices would always rise. Many of those borrowers ended up struggling to repay their mortgage and in danger of losing their home.

The proposals will see prospective borrowers - whether they are first time buyers, right-to-buy tenants or home movers - get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant’s realistic ability to repay their mortgage.

“We believe that these are common sense proposals which serve the interests of both lenders and borrowers,” said the FSA’s chairman, Lord Turner. “While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return. “

At the core of the FSA’s proposals are what they term the ‘three principles of good mortgage underwriting’:
• Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
• This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever; and
• Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.

“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending,” continued Lord Turner. “But it is essential that we understand what their impact would be — how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.

The FSA has significantly amended the proposals following detailed feedback from lenders, consumer groups and other stakeholders and informed by a cost benefit analysis which is also published today. The FSA is now encouraging consumers, industry and all other interested parties to give their opinions on this new, full, set of proposals as well as on the accompanying cost benefit analysis.

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