“The Mortgage Market Review (MMR) set out the case for reforming the mortgage market to ensure it is sustainable and works better for consumers” - Financial Conduct Authority (FCA).
It’s now 10 months since the new lending rules came into force on the 26th April 2014. So has it contributed to a more sustainable market that serves the needs of customers better or has it added confusion to an already complex choice?
The early signs are mostly favourable with some areas of concern. On the plus side: the majority of organisations successfully made the transition to the new regime without major mishap; the supply of mortgages for homes continued; talk of a housing bubble is receding; and competition amongst lenders is strong offering good deals for customers. However, it’s not all been plain sailing. Waiting times for initial interviews have lengthened, the internet-only application is an endangered species, no early parole for mortgage prisoners despite good behaviour, it’s harder for intermediaries, and it’s more difficult to prove affordability for some groups such as borrowing past state pension age or the self-employed.
And customers are still confused! A survey commissioned by Experian found that three quarters of aspiring homebuyers in the UK do not know what the MMR is, and of those who do claim to know, the research reveals that most are ill-informed, with many believing it will mean smaller deposits and relaxed lending criteria.
Among the 28% that claim to know what the programme is:
- 43% think the introduction of the MMR means they can apply with smaller deposits
- 19% believe lenders will have relaxed their lending criteria
- Only 44% correctly understand that it means lenders will be more careful about ensuring that mortgage applicants can afford their repayments, both now and for the life of the mortgage
- Just 15% are aware they will need to speak with an adviser before getting a mortgage [non-direct channel]
- 55% feel more confident about getting a mortgage following its introduction
But does it end in a successful application for the customer? Data suggests there has been no alarming and sudden drop in approval rates although the cooling off in the market has seen approval numbers dropping. Whilst a part of this will be due to lack of affordability, a substantial part will be due to the cooling of the market. The demand for housing out-stripping supply continues to put pressure on prices, therefore we need a stabilising factor to prevent a boom and bust cycle. As the last financial crisis showed, a free market needs regulation to provide a level playing field for competition whilst avoiding the worst of excesses. The new affordability rules appear to be doing that, providing forward looking rates are realistic.
Some groups may not agree. Mortgage prisoners for example – those borrowers trapped and unable to switch to a new mortgage due to the new rules – are still trapped, despite the transitional arrangements that should have avoided this. However, the FCA itself has reported that lenders are not waiving the affordability test for deserving cases, and that customers are stuck on more expensive SVR deals unable to benefit from a cheaper – and therefore more affordable – deal. Lynda Blackwell of the FCA asks whether this is meeting their responsibility to treat customers fairly. Lenders on the other hand are asking for greater clarity and reassurance that they will not be punished in the future for following them. The industry needs to be able to interpret the rules. This can be very complex and when experimentation is needed to establish customer and market behaviour, lenders should be allowed to do so. In return, lenders should acknowledge potential down-sides and have controls in place to identify them early and act accordingly.
Another group disadvantaged by the new rules are the forty-some things (as if they haven’t got enough on their plate). Many people today do not have defined benefit pension plans and pension income is difficult to forecast which makes assessment of affordability into retirement more complex and time-consuming. As a result, some lenders do not provide terms past normal retirement age. However, other lenders have taken a more inclusive approach and assess pension provision and the likely ability of the applicant to work past the normal retirement age. Even so, the net result is that it is harder to demonstrate affordability in these circumstances. This is affecting more and more people as there is a growing trend for mortgage terms to be extended to reduce the monthly commitment to meet affordability criteria. There are arguments both for and against lending into retirement but it seems likely that some latitude is required to handle a diverse set of circumstances.
This uncertainty caused by different interpretation of the new rules has made life more challenging for the intermediaries, at a time when they shoulder more responsibility to guide a customer through the process, which takes longer and pushes up costs. This seems like an ideal opportunity for a pre-qualification service offering an early go/no-go decision for prospects. One could argue that this is what intermediaries do, but the added complexity makes it that much more difficult today.
And what has MMR done to reduce fraud? Mortgage fraud is responsible for the largest proportion of fraudulent application losses (over double that from credit card applications according to National Hunter statistics). In some ways the MMR has made first party fraud more likely. A concern is that customers unable to pass the new rules may be tempted to apply for an unregulated buy-to-let mortgage (“back door residential”) or to exaggerate their financial position, for example. Over half of all mortgage application fraud involves misrepresentation of employment details or false documents. The good news is that currently the mortgage fraud rates suggest this is not happening significantly more than it was before, and it could be argued that the current situation is better than the loop-hole created by the abuse of self-certification pre-financial crisis. However, it is more important now to ensure that accurate verification of documentation is done effectively.
So, MMR: good or bad? I think the new rules are proving a success although there are many that disagree. The mortgage market is functioning well, albeit the housing market is well below its long-term average transaction rate. The affordability rules appear to provide a stabilising effect supporting financial stability. There are some teething problems in specific areas such as mortgage prisoners, and uncertainty around future intentions of both this regulation and the EU Mortgage Credit Directive. However, all things considered, it has been a largely successful first six months.
