"It is good to hear a voice of reason from the director general of the CML as that body is best placed to encourage lenders to avoid excessively restrictive criteria.
"The problem is exacerbated because we not only have a very limited mortgage market at present but it one which is very incestuous and where no lender wants to be the “last man standing” on any particular policy.
Hence when Santander, which prior to early February had one of the more sensible policies on interest-only, decided it wanted to reduce new lending and as part of that process severely curtailed its interest only policy others lenders followed like sheep in rapid succession.
"This included lenders who told me they were very comfortable with their previous interest only policy but as more and more lenders restricted their interest only criteria felt they had no option but to follow suit to avoid getting an unbalanced loan book with too high a proportion of interest only mortgages.
"Part of the problem is caused by the Mortgage Market Review despite the latest version being less onerous for lenders than the original one.
"Lenders are worried about retrospective interpretation of the rules from the Financial Services Authority and/or Financial Ombudsman Service and also about the ambulance chaser parasites.
"As presently drafted the MMR sensibly requires lenders to check that the repayment strategy for an interest-only mortgage is robust at the time of application.
"However it also imposes an obligation on lenders to re-check this at least once at an unspecified time during the mortgage contract but at a time when there is still sufficient of the remaining mortgage term outstanding for an alternative repayment strategy, such as switching to a repayment mortgage to be adopted.
"Inevitably over a contract period as long as for a typical mortgage things will go wrong in a proportion of cases and this risk needs to be managed but that does not mean the baby has to be thrown out with the bathwater.
"If the final version of the MMR removed the obligation of lenders to re-check the repayment strategy at least once after completion and replaced this with a requirement for lenders to remind borrowers every year of their obligation to repay the mortgage, which I think all do now anyway, I think this would remove many of lenders' fears.
"This would leave lenders who wanted to adopt a more interventionist approach free to do so, provided they made it clear by stipulating in the KFI the situations in which they would insist on some changes to the mortgage contract, but allow more sensible policies to be adopted.
"For example it makes no sense to have the same requirements for a low LTV mortgage as one at 75% or above.
"Likewise common sense clearly was no part of the decision nearly all lenders have now taken to assume an endowment policy will produce its projected maturity value based on the middle growth rate and hence taking account of future contributions but ignore future contributions on an ISA set up with regular contributions and furthermore assume either no growth on the policy or, in the case of Lloyds Banking Group, that the current value will fall by 20%.
"Whilst the cartel legislation will be a problem if the CML wanted to try to organise a co-ordinated policy change on interest-only with those lenders wishing to participate in such a move, I hope Paul Smee is considering an approach to the Government to ask for an exemption on the basis that such a move would be in the public interest rather than against it, assuming of course enough of his members would support such a move.
"One other irony in the MMR is that the FSA is placing much more emphasis on the advice process but where the right advice is for an interest-only mortgage, even if only for a few years, the chances of the adviser being actually able to obtain an interest-only mortgage for many such clients, especially outside London and the Home Counties where property values are generally lower, is hugely reduced compared to a few years ago."
