Should mortgage affordability be regulated?
Author: Andy Bedford » Publish Date: 11 March 2009
Hello, and welcome to this first post of the broker’s blog.
As my first topic, I wanted to comment on Gordon Brown’s recent suggestion that there may be a move to regulate the affordability models banks and building societies use when determining how much to lend.
I am probably one of few people in an industry based around percentage commission to think this is potentially a good idea, but I am all too aware of the dangers of getting it wrong.
We currently have a dual regulation system with mortgages being FSA regulated, and non-residential or second-charge lending is essentially unregulated outside of the limited involvement of the OFT (Office of fair trading).
There’s no point regulating affordability on first-charge residential loans without bringing second-charge loans and buy-to-let mortgages into the same body of regulation.
Or the effect will be to encourage further the misuse of buy-to-let mortgages to get a larger loan, leaving the market open to abuse and encouraging people to take more expensive second-charge lending for debt consolidation.
It is important not to get carried away with the sentiment of the moment and bodge regulation just because it seems like a good idea to bring the banks into line with each other.
Perhaps the question should be; is it time to regulate all non-commercial lending under the same body? As well as limit the affordability calculation used (and I include buy-to-let lending within non-commercial).
The answer is probably yes.
However, even then, there is a difficult question to consider; how do you regulate that without leaving many people locked out of a re-mortgage?
Because whilst it is favourable to have control over the fire of house price inflation, it isn’t a good idea to lock people on existing 4 to 5 times income mortgages out of competitive new rates; whilst at the same time leaving them exposed to their variable rate and every change of bank base rate.
Whatever the government does decide, they need to think carefully about how to do it without leaving thousands of people in even more danger of mortgage default.
Another important aspect is it will likely further the reduction in house prices which would, at present, leave people deeper in negative equity.
There are still many areas where the average first-time buyer can’t afford to buy at four times their income. So the market is still generally overpriced, and bringing in this type of regulation could worsen the pain of the credit crunch for many, particularly for those who have pushed their income further and are already treading water with repayments.
So, in my opinion, whilst regulation is needed, a bull in a china shop approach could be disastrous.