Thursday, July 29, 2010

Note to Lord Turner, Take No Notice of the CML

I've been reading with interest what the Council of Mortgage Lenders has been saying about the FSA's mortgage review and I really don't like what they're saying.

The FSA's mortgage review can be found here, it makes a few modest proposals in particular that:
  • Mortgages are only issued to consumers that can afford them (the customer's mortgage payments should not take their total expenditure over their total income and should include a level of contingency).
  • Affordability is to be calculated on a repayment rather than in interest only basis.
  • All mortgages will require proof of income
  • When lending to borrowers with a bad credit history, total borrowing is to be reduced by a defined "buffer zone" amount (so if a borrower could normally borrow £150,000, it might be reduced by the buffer zone percentage, say 20%, to £120,000).
To me these proposals seem both sensible and reasonable (if a little tame), the UK housing market may not have been problematic so far, but we know from the experience in the US the damage that a bursting housing bubble could do. It's a surprise then, to read exactly what the CML thinks about the FSA review.
On a cursory review of the cumulative impact of the proposals in the FSA consultation paper, we do not believe the FSA will achieve its desired outcomes. And it risks serious unintended side effects which will be damaging to consumers' housing choices and to the economy more generally.
I just don't get this attitude, the mortgage market of the noughties is not something to be prod of. The level of choice in the market moved achived the kind of levels that mean't that whole industries sprang up centered around helping customer's decide. The rise of mortgages sold through financial advisers rose to the point that advisers were bidding against each other for potential customers.

Another clear lesson from the noughties is that increasing the available amount of credit didn't do much to aid housing affordability since house prices rose to reflect the increased availablilty of funds. Allowing consumers to stretch themselves is that lenders make more money, but that is not necessarily in the interest of consumers or the more general interests of society.

It really has to be asked why requiring borrowers to prove their income is unreasonable, and why these perfectly sensible measureas are some how depriving consumers of responsiblility. The proposals put forward by the FSA are a sensible response to an overinflated and incredibly risky housing market. The CML's response is nothing but partisan posturing in the name of it's mambers own profit seeking.

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