Black Beauty: A Recovering Quadruped

FSA urged to act over 'risky' mortgages

Maria Scott, personal finance editor
Sunday January 2, 2005
The Observer




Mortgage lenders must ensure that borrowers taking out 'self-certified' home loans, where no proof of income is required, are not putting themselves at risk by exaggerating their income, according to the Liberal Democrats' Treasury spokesman, Dr Vince Cable.
Cable has written to the Financial Services Authority asking what steps have been taken to control applications for self-certified mortgages. This follows the publication of statistics from the Council of Mortgage Lenders showing that there has been a sharp increase in this type of lending. At the end of 2003, 19.2 per cent of all mortgage balances were in the form of self-certified, or 'income non-verified', loans, but during the second half of that year this type of loan amounted to 28.3 per cent of gross home loan advances.

Cable said: 'I am extremely concerned about the increase in self-certified mortgages, especially as individuals are often tempted to overstate earnings to secure loans.'

The Financial Services Authority took over responsibility for regulating mortgages in 2004 and Cable said it was 'absolutely essential' that the regulator prevent individuals from being able to overstate income levels.

'We are now in a climate of rising interest rates and falling house prices with mortgage repayments on the increase. The FSA must make it clear what guidelines are in place and what extra precautions are being taken to prevent imprudent and improper behaviour.'

Self-certified mortgages have traditionally been used by the self-employed to obtain home loans when they do not have long histories of consistent income. However, fears have grown over the past year that many borrowers are using the loans to obtain mortgages much larger than lenders would normally advance. The traditional multiples of income used as a yardstick for mortgage affordability is three times one income, plus the income of a second borrower, or 2.75 joint incomes. However, rising house prices have meant that loans based on such calculations are often inadequate to purchase properties.




A television investigation last year indicated that some brokers were encouraging borrowers to use self-certified mortgages to obtain potentially unaffordable home loans.