Borrowers will face stringent tests to determine whether they can afford mortgages, under new regulations set by the Financial Services Authority (FSA).
The body has set out a raft of new proposals for major reforms in the UK mortgage market, with the aim of ensuring that the sector works better for consumers and becomes more sustainable for market participants.
Key features of the review include: imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay; banning self certification mortgages through required verification of income; and banning arrears charges when a borrower is already repaying, thus ensuring firms do not profit from people in arrears.
While no caps were made in loan-to-values, loan-to-income or debt-to-income, the FSA said it would not rule out such changes if the initial proposals do not have a sufficient effect.
Under the new rules, all mortgage advisers will be personally accountable to the FSA. "The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress," said Jon Pain, FSA managing director of supervision.
"We recognise that we need to bring about a step change in regulation and we need to act now to address the issues we have identified."
The reaction to the proposals has been mixed. "The vast majority of the British population aspires to home ownership and these proposals must not frustrate the sensible ambitions of potential homeowners," said Paul Broadhead, head of mortgage policy at the Buildings Societies Association.
"We are pleased that the FSA is not setting maximum loan to income or loan to value ratios. We welcome the FSA's recognition that lenders need to focus on borrower's levels of disposable income."
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, commented: "Although the FSA admits to some of its own errors, it is playing to the gallery by heaping blame on non-banks and non-income verified lending as being at the centre of the market's problem.
"This is too simple an argument. Non-banks weren't the dominant lenders in the markets in which they operated and non-income verification lending was underpinned by credit scoring systems."
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