Regulatory change and underwriting
Matt Smith Senior policy adviser 28 September 2009
Running order
• • • • • The Turner review The mortgage market review What is product regulation? Underwriting regulation – what’s next? Is there a place for LTV/LTI caps – the view’s of CML members • The next steps: dealing with the detail • The industry view
Mortgage market review
• FSA’s business plan 2009/10 announces the mortgage market review (an expansion of the MCOB review) and will include:
– the ‘whole value chain’ (lenders, intermediaries and consumers – all regulatory levers (conduct of business, prudential and financial crime) – If there will be a read across of the RDR to the mortgage market – and, crucially, determine the FSA’s position when lobbying the EU.
The Turner review
• In March the Turner Review asks open questions about:
– the possibility of capping products – specifically LTV and LTI levels; – lists alternative approaches including enhanced capital requirements and regulation governing the underwriting of mortgages (income and affordability); and – discusses expanding the FSA’s scope to include second charge and buy-to-let.
• It is clear that retaining the ‘status quo’ is not option, change is going to happen.
What is product regulation
• What is product regulation?
– banning products – capping/limiting products – signing off products
• Why regulate products?
– Some products are seen to be harmful to all customers, in all circumstances. – To protect against irresponsible lending and irresponsible borrowing (regulatory paternalism).
What is product regulation
• Do the FSA really want to regulate products?
– Single premium PPI – Building societies sourcebook (CP09/17)
• Splits lenders in two three categories • Compulsory MIG over 80% LTV • Limits on the amount of BTL, shared ownership
– Jon Pain’s speech 18 September:
“In the past some markets have failed to work well for consumers, and financial innovation has in some cases delivered little benefit…Consequently we will approach product regulation with an open mind in future…”
Underwriting regulation – what’s next?
• What do they do now? – TCF – MCOB, specifically MCOB 11 – Prudential supervision of individual firms • What’s next? – Income verification – More robust definition of what constitutes an affordability check
“there are lots of mortgage players who have very sophisticated tools to
assess genuine affordability…That is what we need to get the whole of the mortgage market adopting as opposed to a simple income multiple; that is not a true test of affordability.” Jon Pain, Treasury Select Committee, 7 July
Underwriting regulation – what’s next?
• What’s next?
– Clarification of the role of lenders and brokers. – Changes to the disclosure regime (both FSA and Europe). – Growth in scope – BTL and 2nd charge.
Changes to how UK mortgages are regulated are necessary
Don't know
Strongly disagree
Disagree
Agree
Strongly agree
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
One aim of FSA mortgage regulation should be to dampen market cycles
Don't know
Strongly disagree
Disagree
Agree
Strongly agree
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
FSA mortgage regulation should further enhance consumer protection
Don't know
Strongly disagree
Disagree
Agree
Strongly agree
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Some mortgage products should be banned
Don't know
Strongly disagree
Disagree
Agree
Strongly agree
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
How should FSA deal with "high risk" mortgage products?
Other (please specif y)
No action needed
Flag "higher risk" products w ith consumers
Def ine "higher risk" products and strengthen sales process f or them
Ban unacceptable products
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
How certain mortgage products are perceived - Self-certified
Self-cert for employed
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60%
Self-cert for self-employed
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60%
Perception of mortgage procedures - Fast track loans
Fast track loans up to 75% LTV
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60%
Fast track loans over 75% LTV
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60%
Perception of mortgage product features
LTV 90% - 95%
Don't know Unacceptably high risk High risk Medium risk Low risk 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60% 70% 80%
LTV 95% - 100%
LTV 100% +
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60% 70% 80%
Perception of mortgage product features – single income multiples
3.5x – 4x
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60% Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50%
4x or more
Perception of mortgage product features joint income
2.75x – 3x
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60%
3x or more
Don't know Unacceptably high risk High risk Medium risk Low risk 0% 10% 20% 30% 40% 50% 60%
Should the FSA enhance MCOB 11?
What an affordability check should include?
What w ould be an acceptable income check?
65%
70%
75%
80%
85%
90%
Would FSA actions in such areas as income verification and affordability checks be preferable to, and reduce the need for, prescriptive intervention on LTVs and income multiples?
Don't know
No
Yes
0%
10%
20%
30%
40%
50%
60%
70%
80%
CML’s key pre-consultation messages
• We agree that the review is necessary. But MCOB remains largely fit for purpose. • it is important to recognise the strained market conditions into which the mortgage market review will be launched. • Given this, the FSA has to be sure that the cumulative impact of any measures to regulate lending, are not too onerous. • We are not persuaded that banning particular product features or prescribing sales requirements is the correct means to addresses potential consumer detriment. • Equally taking differential approaches by type of lender will encourage competition.
Next steps: dealing with the detail
• To date, this is based on a section of the Turner review, speeches and meetings. • The DP is due out sometime in October
– Product regulation (LTV/LTI caps) – What constitutes income verification – What is a ‘minimum’ acceptable affordability check
• European mortgage legislation is looking likely – this may contradict current or planned UK mortgage regulation.
Questions?
Matt.smith@cml.org.uk 020 7438 8930