The European sales director of Clayton Eurorisk and former chief executive of specialist lender edeus says the mortgage market badly needs funding from the wholesale and securitisation markets to grow but that investors still lack trust in the quality of UK mortgages.
He says a key reason for this is UK banks’ reluctance to give up non-income verified fast-track loans – something the majority of lenders would like to see stay in the market despite the Financial Services Authority’s proposals in its Mortgage Market Review paper to scrap them.
The FSA said in CP 10/16 it was concerned that fast-track mortgages would be “gamed” if self-cert mortgages were removed from the market as they would remain the only product not requiring proof of income still on offer.
“Lenders appear still to be dragging their heels on fast track,” said Bolton. “But there is no justification for it staying. It’s as open to abuse as self-cert is. It’s just another version of a liar loan.
“The reason large lenders are trying to keep it is that they don’t have the underwriting capability to underwrite every loan they want to make. So they’re resisting its demise aggressively from a cost point of view. I think lenders are perhaps overlooking to a degree the credit implication of trying to keep fast-track.”
Bolton says lenders should be “bending over backwards” to show they are scrupulous on affordability and income verification for all loans if they want investors to start buying UK mortgage asset again.
Those defending fast-track say arrears rates are far lower than average, reflecting lower risk. Many lenders also only offer fast-track on low loan to value mortgages.
“The LTV is not the factor on fast-track,” Bolton said.
“Bank of Scotland was doing to 95% LTV fast track loans at the peak of the market for example. It’s whether the broker can second guess how to get an A pass on the automated underwriting for fast-track loans – in the past brokers knew exactly how to play the system.
“Ultimately both self-cert and fast-track require no income verification and as such there is a spurious distinction between the two. Until lenders give it up investors are going to continue voting with their feet by not buying securities backed by UK mortgages.”
