The hypocrisy of Self Certification Mortgages - a broker responds to FSA actions

For all the brokers and financial advisers who have at any stage arranged a mortgage without income proof (a self certification or non status mortgage), whether for a self employed person or indeed for an employed person, now is the time to raise your head above the parapet and stand firm for what is actually the truth within the market as a whole.

The very simple principle leading to self certification mortgages becoming popular is greed for capital growth and income by everyone. That includes us the brokers of course, the banks offering the mortgages and indeed the clients. The greed to improve ones personal or family state of affairs is a common principle engrained in almost every human being, despite their political persuasion, religious beliefs and social demographic. It is not a characteristic restricted to any particular segment of the population either in the UK or abroad and also extends to all corporate entities.

As far as I can recall, self certification mortgages were first offered officially during the mid to late 1980s to aid property purchasers from many social and financial backgrounds to achieve property ownership for the first time. The most important criteria as far as the banks are concerned of course is that they can make a profit from the transaction. Interest rates are most often charged at a slight premium in view of the perceived increased risk and equity levels within the property need to be sufficient to ensure little chance of capital loss.

In the mid 1980s the government strongly encouraged council tenants to purchase their properties, offering massive discounts, sometimes in excess of 50%. It was easy therefore for banks to begin lending their money to support these transactions with very little risk. Thus the housing boom began. As properties rise in value, equity levels increase, more banks see the opportunity of making money, therefore enter the market and of course more customers want to take advantage of the market; therefore buy larger and more expensive properties.

Let's talk about the rules and methods of underwriting a self certification application. The application form always needs to be completed in line with the lenders underwriting criteria. Therefore if the client wishes to borrow £200,000 and the lenders income multiple is 3.5 times salary, the client needs to disclose an income of about £60,000 minimum. In the majority of cases the lenders offering the lowest interest rates will be most likely to also offer the lowest income multiples. This is referred to as "responsible lending". What it really means is that if the clients default on payment and the bank want to repossess the property, they will be able to justify to the court their decision to lend the money in the first place.

Obviously if the client entered a present income of say £10,000 on an application for a mortgage for £200,000 and subsequently defaulted, the court would have every right to tell the bank they should never had lent the money in the first place. There is, and always has been therefore rather a conflict of conscience in terms of income declarations. On one hand the banks want to cover themselves quite rightly to ensure they get their money back in the event of default. On the other hand in ninety nine out of one hundred cases the customer asks the question. Do I lie about my income or do I tell the truth and have my application rejected?

And of course we as brokers are caught right in the middle earning a substantial commission from both parties, which is fine when things are going well, but puts us firmly in the firing line when properties lose value, leading to customers and banks losing money. In my view, income declarations should never have to be made on a self certification application, in which case no lies would ever have to be told. The key facts illustration should be presented to the customer and if he feels he will be able to afford the repayments, he should simply complete a declaration confirming acceptance and understanding of the terms, and his intention to make repayments.

As far as the long established income declaration requirement is concerned, the obligation is ridiculous. Self employed people are made to declare their net profit for the past one, two or three years, plus their existing income. Some lenders will calculate the mortgage by using the latest figure. Some lenders will take an average over a specific period. How can they justify declaring an income higher than the figures shown in their accounts? If they receive self employed income from lots of different sources, they are still obliged to declare it on their tax return. If they receive "cash" for casual jobs which they do not include within their accounts, they are defrauding H M Customs and Revenue. Which is worse; defrauding the mortgage lender or the government?

It's a shame they have to make a choice! Some self employed people apply for a self certification mortgage because they haven't been trading long enough produce accounts. Some lenders offer mortgages to these people as long as they have been trading for a minimum period of three months. Unfortunately these lenders quite correctly tend to charge higher interest rates to accommodate the increased risk. In any event the customer will have to exaggerate his projected income for the first year, so does he tell a "big" lie and apply to the lender asking for three years history or does he tell a little lie and exaggerate his income for the first year, but pay a premium? An interesting conundrum!

Turning my attention to employed people. Ha Ha! Surely if one earns a salary, one can prove it with salary slips and in most cases these days, bank statements. If a customer earns commission or overtime, this will be shown on the pay slip. If the customer is applying for a mortgage in February and is telling the lender he will receive a large bonus in October, how will he pay his mortgage for the first six months? No lender will accept a payment holiday in the first six months. If the customer is telling the lender he earns a substantial sum in tips, he is legally obliged also to declare these on his tax return, as he is if he is doing casual work in any capacity.

Speed of application is also no excuse, as it takes no time at all to post simple documentation like pay slips. The vast majority of people apply for self certification mortgages because they are not earning enough money to apply legitimately. They disclose income on the application form to satisfy the lending criteria and to achieve their life objectives. They may well be spending the extra money they raise to increase their income by investing in business or additional property, and in most cases, particularly in a booming market the chance they take will pay dividends, but in order to get to that stage, they invariably have to lie.

The self certification sub prime market is even more volatile as far as lies are concerned. One of the reasons customers will be "sub prime" in the first place is that they have had credit problems in the past. If they are in arrears with their present facilities (possibly with traditional lenders at low interest rates) how are they going to be able to afford repayments for a larger mortgage at higher interest rates. Nevertheless, until the credit crunch took effect there were a number of banks offering up to 85% of property value on a self certification basis to people with unlimited arrears and county court judgments!

Now don't misunderstand me. I have absolutely no problem with commercial organizations offering products to people to make a profit. If the customers want to borrow substantial sums at extraordinarily high interest rates in order to temporarily dig themselves out of a mess, to stop a bankruptcy order or repossession, they should be able to make that commercial decision and take responsibility for it. If the banks want to risk their money at higher profit margins to lend to these people on the basis that either their circumstances will change or the property will increase in value making the loan more secure in due course, that's also fine. In a rising market everyone wins as usual. But in a suddenly declining economy and property market, where the risk of loss becomes ever more evident from both sides, do not let the market use the brokers as scapegoats.

The banks know exactly what type of customers they are lending to and the customers are fully aware of their commitment to make repayments in line with the offer terms. The brokers are facilitators, valued by both parties during the transaction. They are not rogues, taking advantage of and forcing innocent parties into dodgy contracts; as it seems they are presently being portrayed as. It is though much easier and ultimately much less consequential to blame financial advisers and mortgage brokers for the lies which are written on application forms, than it would be to blame and penalize any of the banks or indeed the millions of customers involved. Every time a mortgage broker is investigated and penalized for submitting exaggerated occupation and income details, it's great publicity for the FSA who are able to jump on their soap box to claim they are righting the wrongs within the mortgage market, making sure that when people apply for a self certification mortgage they only disclose accurate and honest information.

Let's face it a few mortgage brokers drummed out of business for the sake of some great sound bites is well worth the trouble and indeed won't affect the economy or the publics' confidence in the government at all. In fact if 1000 brokers left the market one year, a further 1000 would no doubt join in their place as soon as demand dictated. Of course it would be a different matter if a mortgage bank had their license revoked for encouraging and accepting self certification deals. Or if a dozen mortgage banks were stripped of their ability to lend: - the property market and the economy could collapse completely and for many years, as the other banks then refused to lend beyond the most basic criteria and no new self certification lenders from the UK or overseas dared to re enter the market.

At 3.5 times the average UK income and a 15% deposit, the average house price within the UK would come down to £115,000 with most people being forced to rent property. Banks have a justifiably enormous influence in the economy and can weald vast power, sometimes on their own in the case of Northern Rock which was bailed out by the tax payer rather than being allowed to collapse, and certainly collectively they have sufficient influence and strength to effect all our futures.

Don't let us kid ourselves therefore that the regulatory authorities would dare to weald anything greater than some friendly guidance to the banks regarding their self certification facilities. Any government sanctioning the collapse of any of the main self certification specialist banks would be committing political suicide. It would never happen. I understand although the FSA are taking mortgage brokers to task for sending self certification applications to the banks, they have no intention of recommending any action against any of the customers (which over the last ten years must be many millions).

They claim they have no authority to take any action against anyone outside the regulatory regime! Surely though, if they know a crime has been committed, they have a duty to pass those details to whichever authority has the power to take action. For every mortgage broker the FSA take action against, there are likely to be dozens or hundreds of customers who should potentially be prosecuted for fraud each year. In fact almost every customer who has ever applied for a self certification mortgage should be prosecuted.

Probably millions of adults across every demographic in the UK should be charged and convicted of fraud. Why is no action being taken? Because the police could not cope with all the extra work, because the courts could not process all the cases, because the prisons could not house the convicted, because there would be a national rebellion as between 30% and 50%% of all the households were put under threat. The public would not tolerate being summarily rounded up and charged with a crime they were right in assuming was acceptable to every self certification lender throughout the last twenty years.

Look to the future, not to the past. If banks feel justified in lending 95% of property value without income proof to people with credit problems, as long as the terms of lending are clearly outlined and understood by the consumer and are agreed and they both feel there is a profit to be made, who has the right to prevent the contract? In an open supply and demand capitalist market let the lenders and the consumers decide the underwriting terms and the rates on offer.

Rest assured the banks will only lend on the basis they will make a profit and the customers will only borrow if they feel they can service the loans and make money also on the deal. Neither are stupid enough to enter into a transaction if they feel they will lose in the long run and both want to continue to have the opportunity of maximizing their returns. It's easy to direct the wrath regarding the past misdemeanors within the mortgage market at financial advisers and brokers for some cheap and easy publicity.

Change the basis of self certification to the extent that people do not need to disclose their income, only their intention and ability to repay the loan within the terms outlined within the offer, and insist in the future that all income disclosures are underwritten on a full status basis (If you state your income, prove it). By all means cut out the need to lie in the future but do not let anyone pretend that all parties involved in the self certification market have not been fully aware of all the implications and issues. Either penalize everyone or penalize no one.


In other words, boo hoo, it''s not our fault we helped people and banks in systematic fraud that helped drive a massive credit bubble that nearly destroyed the global economy. Others should take some blame too, fair enough - but don''t try to pretend brokers weren''t responsible for telling people ''what lies to tell'' to get through the system. - S Goode

The Scapegoat intermediary is lined up once again, someone has to be blamed for ''consumers'' losing their shirts even if they were well aware of the risks. When will ALL regulated firms stand up to this? If not, why not? - E Owen