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Clare Francis: Last October the Financial Services Authority published its Mortgage Market Review (MMR), in which it proposed substantial changes to the mortgage market.
It's since been consulting on those changes and has confirmed that it would like to implement some changes in key areas, such as the way lenders deal with customers who are in arrears and who are struggling to keep up with their mortgage repayments. So what's all this going to mean, will it actually help those who are struggling to meet their mortgage repayments every month or is it just going to make it harder to get a mortgage, and what lessons have we learned from the last few years which are going to shape the market going forward.
Lesley Titcomb, who is the director of the mortgage section at the FSA, is here to explain.
Q1: So Lesley, the consultation paper that you have announced, follows on the back of last autumns mortgage market review, and you have announced changes to the way arrears are dealt with and handled by lenders. Obviously for a lot of people its a growing problem on the back of the recession, a lot of people are struggling to keep up with their mortgages payments. What have you done? What is going to change?
Lesley Titcomb: Well what we have announced are some changes to our rules. First of all to make sure that mortgage lenders really give every consideration to how they can help someone who has got into arrears.
At the moment our rule book phrases this in terms of guidance and we are changing some of the 'may' languages to 'must' language to actually insure that they offer every opportunity they can to someone who has found themselves in arrears to find a way of staying in their home. Such as for example giving them a repayment holiday, putting them on a interest only mortgage for a while.
The other thing we are doing is outlawing some of the worst practices we have seen in terms of arrears charging. So for example where somebody has agreed to pay a lump sum as part of an arrears payment arrangement, we don't want them to then be charged an early repayment change on that amount, that seems completely unreasonable. So we are outlawing that find of practice.
Q2: I think that that has been one of the problems hasn't it. There has been is feeling that people are dealt with differently depending on who their lender is?
LT: That's right. One of the important things is that we do want lenders to treat people as individuals, but we want them to do that also in a way that is treating the customer fairly as well.
Q3: And one of the other things that the mortgage market review addressed is who lenders lend to and in the past, pre credit crunch, certainly there has been accusations that lenders lent irresponsibly to some people and gave mortgage to people who perhaps should never had them, yet when the MMR was put out last October there where criticisms and accusations that the FSA where going to be looking with a fine tooth comb on exactly who was spending what and what they where spending it on and that this was a bit to big brotherish and going a bit too far. Can you just explain what you are trying to do with this sort of element?
LT: Certainly, and I think this is very important. The central core of our proportion is what we call responsible lending and you would think that if you where going to lend some money to somebody, you would want to check pretty carefully that they are able to repay it before you make the loan, but we can see that a lot of lenders have not been doing that.
So, what we are now saying is that there has to be a proper affordability assessment. So the lender has to look at the sources of income that the borrower has and generally how much they spend, so as to look at how much money they have got left each month to repay the mortgage. We have seen cases where some peoples repayments where more then their monthly income, so how can they possibly afford that?
So, responsible lending and a proper assessment of affordability is key. Does this mean that your lender will be asking you how many cigarettes you smoke? No it shouldn't be. When I first took about my first mortgage, when I was about 25 - 26, I had to fill in a reasonable form that was about my various sources of income and then some broad categories of expenditure that showed my monthly household outgoings, and that is what this is about.
So it's not too intrusive but it does enable the lender to get a proper picture of someone's ability to repay.
Q4: And ultimately it's in the consumer's interest not to be given a loan that they can't really afford, because its just miserable, if every month, you're scrabbling around to try and pay the mortgage and having to make significant cut backs on the way that you live.
LT: That's right, I would encourage consumers to, first of all, be absolutely honest with their lenders, and secondly, to think very hard about whether they can afford the mortgage now but more importantly or so if circumstances change in the future, what is that going to do to their ability to repay.
So some of this is also about encouraging consumers to think, at the point of borrowing, about their ability to repay the mortgage, because after all what there really interested in at the time is whether they are going to be able to get the house of their dreams or not.
But we want them obviously to think through very carefully whether they can afford the loan.
Q5: And obviously it's been a really tough time for borrowers over the last couple of years and its not just those who's own personal circumstances have been affected by the economic down turn and who have struggled to meet their payments, b ut also borrowers who have never had a problem in the past, have always kept up with payments, have always be able to get a mortgage, have in some instances, found that they cant remortgage when their current deals ends or they cant move house because they don't have a big enough deposit because of the contraction within in lack of willingness to lend on behalf of lenders. Are things improving? Are we past the worst?
LT: I think we are cautiously looking at the coming year that we except that it maybe a bit better for people then the previous year, but we are still pretty cautious on that, and people are still going to have to be careful, for example, we are still not sure whether unemployment has peaked, for example, and there maybe more people who loss their jobs and therefore find themselves in difficulty.
I think it's a mixed picture at the moment, but we are saying what we want to see is responsible lending and responsible borrowing on the part if both lenders and consumers, hence our proposals.
What we are seeing at the moment is that on average people are being asked to put down a deposit of, say 25%. So it does seem to be holding at about that level, and there is no doubt that levels of lending is slightly up on this time in previous years, so there is defiantly an increase in the levels of lending, so some sighs of improvement, but we are still pretty cautious.
Q6: 25%, is that still overly cautious? Or do you think that is actually what we should get used to envisaging having to save if we want to buy a house?
LT: I have no reason to assume that's going to change dramatically over the course of the coming year.
CF: Thanks you Lesley.