Housing and legal bodies warn of 'dire consequences' from new mortgage rules

The Guardian newspaper today reported that a coalition of the UK’s leading housing and legal organisations have written to Chancellor George Osborne warning of "dire consequences" for homebuyers and the building industry if Financial Service Authority proposals for mortgage regulation are implemented.

Eight influential bodies, including the House Builders Federation, the National Housing Federation and the Law Society, said the proposals would be so onerous, overly-prescriptive and expensive to put into action they would put many lenders off providing mortgages. The coalition warned the new rules would decimate mortgage availability for first time buyers and lower income households, and would result in house building levels, already at an 80 year low, drop still further. Building directly and indirectly supports professions from house builders to brick manufacturers, so reductions would result in job losses "the impact of which would ripple through local economies across the country" it said. Jonathan Fair, chief executive of Homes for Scotland – another co-signatory on the letter, said: "In its efforts to create a mortgage market that is sustainable for customers, we believe that the FSA proposals take regulation too far and could result in a market with fewer participants, less competition and less choice at a higher price for customers. We fear that the proposals could be damaging to customer’s housing choices and to the economy more generally, perversely at the very time where all other public policies are being driven to improve these conditions".

The new rule requires the lender to have to assess the borrower’s free disposable income. This would potentially prohibit self certified and fast-track mortgages. The regulator also proposes the elimination of "toxic combinations" such as lending high income multiples to borrowers with a poor credit history.

According to the Guiardian the FSA refused to comment on the letter, but this month it defended its proposals against criticism from lenders, saying a clampdown on lending criteria was necessary to protect the 46% of UK households that have no money left each month after paying their mortgages and other bills. However, the eight organisations claim that research shows that if the FSA’s "draconian" proposals had already been implemented, nearly half of the 11m current mortgage holders would not have been able to borrow the amounts they needed, and up to one quarter would not have been able to borrow anything at all. In the future, the proposals would mean that up to 153,000 house purchases would not be possible and 57,000 first time buyers would be refused mortgages. They also warned that unless the FSA changed its view that lending on shared ownership properties is "sub-prime", with the borrowers more likely to default on their loans, banks would continue to turn away more than £240m of valid business. In 2009/10 this resulted in 4,600 low cost homes being left vacant, even though 110,000 households had applied to move into them. David Orr, chief executive of the National Housing Federation, said: "If the FSA does not amend its stance, it will strangle mortgage lending for first time buyers and destroy the ability of lower income families and key workers, priced out of the open market, to part-buy shared ownership homes from housing associations."

The other four bodies signing their names to the letter were the New Homes Marketing Board, Homes for Scotland, the Chartered Institute of Housing, the National Housebuilding Council and the National Federation of Property Professionals.

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