MMR branded inadequate

A report published by the body said while the MMR had “much to recommend it”, the lack of macroeconomic consideration in the proposed rules made it “hard not to view the FSA proposals as inadequate”.

The report, Forever Blowing Bubbles: Housing’s role in the UK economy, authored by Tony Dolphin and Matt Griffith, said: “The FSA has placed its emphasis on consumer protection and patterns of current arrears in its rationale for intervention, rather than looking at questions of macroeconomic stability and the build-up of leverage within the economy.

“For example, it has rejected caps on loan to income lending, citing low levels of default rates, despite analysis showing LTI lending played a major role in driving up the level of leverage within the mortgage market.

“The FSA has also placed strong emphasis on a continued approach to affordability lending, with discretion being put primarily in the hands of mortgage lenders. This raises questions as to whether this approach does enough to constrain the overall level of debt taken out by individuals and of mortgage leverage within the economy.

“In placing lending decisions within relatively loose and subjective affordability criteria it also suggests the danger of an inherently pro-cyclical approach from lenders – loosening criteria in booms and tightening them again in busts.

“There is a strong case for taking a broader view than this – given the economic importance of the market involved.”

The report suggests the regulator impose much tighter controls on the mortgage market including limiting leverage in the mortgage market, controlling future securitisation as a source of finance in the housing market, tighter control of lending by non-banks, greater deposit requirements on buy-to-let mortgages, and caps on loan to value and loan to income ratios.

It said: “We call upon the Financial Services Authority to do more on these fronts in its Mortgage Market Review and on government to make greater house price stability a central plank of its economic policy.

“It is high time we re-examined the case for mortgage reform in the light of international lessons and our own rollercoaster ride on housing. After all, there is nothing aspirational or equitable about courting another recession.”