Should Affordability be regulated?
Hi and welcome to this the first post of the brokers blog.
As my first topic I thought I would comment on Gordon Browns recent suggestion that there may be a move to regulate the affordability models used by banks and building societies when determining how much to lend to a borrower.
I am probably one of few people in an industry based around percentage commission to think that this is a good idea in essence, but I am all too aware of the dangers of getting it wrong.
The point being the dual regulation system we have currently with Mortgages being FSA Regulated and non residential and second charge lending being 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 into the same body of regulation, or the effect will be to encourage further the misuse of Buy to Let mortgages for the purposes of getting a larger loan leaving the market still open to abuse and also encouraging people to take more expensive second charge lending for debt consolidation.
Its 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 (and I include Buy to Let in non-commercial) as well as limit the affordability calculation used?
The answer is probably yes. However even then there is a very important thing to consider, how do you regulate that without leaving a significant number of people locked out of a re-mortgage? Because whilst it is favourable to have a control on the fire of house price inflation it definitely isn’t a good idea to lock people on existing 4 to 5+ times income Mortgages out of competitive new rates, at the same time as leaving them exposed on their variable rate to every change of bank base rate.
Whatever the government does decide to do on this they need to think carefully about how it can be done without leaving thousands of people in even more danger of mortgage default.
Another important aspect to it is that it will be likely to further the reduction in house prices, which would currently leave people deeper in negative equity. There are still many areas where the average first time buyer simply can’t afford to buy at 4 times main income, so the market is still generally overpriced in many areas, and bringing in this type of regulation could worsen the pain of the credit crunch for many particularly those who have pushed their income that bit further and are already treading water.
So in my opinion whilst it’s definitely needed, a bull in a china shop approach could be nothing short of disastrous.