These are the slides from my presentation on the FSA\'s Mortgage Market Review CP 10/16 at the BBA\'s Retail Banking Scotland seminar on 26.10.2010

1. MORTGAGE MARKET
REVIEW
John Lunn
26 October 2010

2. Introduction
Topics to be covered:
• Mortgage Market Review CP 10/16
• European dimension
• How mortgages might be sold in the future

3. MMR – setting the context
• Thematic reviews from 2005
• Sub-prime
• Interest only
• Self certified
• Lending into retirement
• Credit crunch focus on prudential issues
• CP 10/16 – FSA sets out the changes they
believe are needed to achieve their aims

4. MMR - aims
“to deliver a more responsible approach to lending
in the future, to ensure a sustainable market and
one that works better for consumers”
“to have a mortgage market that is sustainable for
all participants and to have a flexible market that
works better for consumers”
FSA CP 10/16: Mortgage Market Review

5. Overview of FSA MMR proposals
• affordability assessments
• interest only mortgages
• product regulation
• arrears charges
• responsible borrowing – educating the
consumer
• non-deposit taking lenders

6. Affordability assessments - 1
“lenders should assess consumers’ ability to repay for all
mortgage applications through an assessment of their
income and expenditure, and lend only where the
mortgage is assessed as being affordable in light of
their free disposable income”
“a mortgage is affordable if its level and terms allow the
consumer to meet current and future obligations in full,
without recourse to further debt relief or rescheduling,
avoiding accumulation of arrears, while allowing an
acceptable level of consumption”

7. Affordability assessments - 2
• Practical implications
• verify income for all apps: case by case basis
• can use statistical data, but must justify model
• free disposable income
• “maximum borrowing capacity”
• Consequences:
• end of self-cert
• end of fast track (income verification)
• issues for self-employed
• issues for all of us if rules are too rigid

8. Affordability assessments - 3
• Affordability tests
• committed expenditure
• contingency expenditure – “life events”
• use C&I basis – effect on FTBs
• use 25 year term
• stress test against rate increases
• “credit impaired” – buffer of 20%

9. Interest only mortgages - 1
• FSA evidence:
• IOMs used to extend affordability, often with
no firm plan in place to repay capital
• Data points to 33% of new mortgages on IO
basis, with approx 75% of those having no
specified RV
• FSA view:
• This is an affordability issue – you should only
get an IOM if you have a valid RV in place

10. Interest only mortgages - 2
Repayment vehicle:
“A realistic plan to repay the capital that
does not involve relying on house price
inflation or an unrealistic intention to
downsize at the end of the term”

11. Interest only mortgages - 3
• FSA proposals:
• monitor RV existence annually
• check “adequacy” every 5 years
• ban “sale of property” as an acceptable RV
• special limited life IOMs for FTBs?

12. Interest only mortgages - 4
• CML/BSA responses:
• proposals expensive, not commensurate with risk
• research does not bear out risks v. benefits
• consumer responsible for adequacy checks
• lender to have policy on acceptable RVs
• lender validates RV during app process and checks
existence once during term
• if no RV – remedial action
• new business only
• annual statement reminders (already)

13. Other FSA proposals in MMR
• product regulation
• arrears charges
• responsible borrowing – educating the
consumer
• non-deposit taking lenders

14. Implementation issues
• further CPs in 2010/2011
• recovery of markets??
• FSA break up of powers
• European dimension

15. European dimension - 1
• European Working Paper (July 2010):
“Responsible mortgage lending and borrowing”
• Aims at an EU level:
“to help minimise consumer detriment, improve
customer mobility, facilitate cross-border activity
and create a level playing field throughout the EU”

16. European dimension - 2
• scoping issues
• broad principles, targeted harmonised provisions
• COB issues:
• general operating conditions
• advertising and marketing
• standardised PCI – compulsory ESIS on home loans
• adequate explanations
• assess creditworthiness
• assess suitability of credit products for consumer
• advice standards when advice is provided

17. European dimension - 3
• Prudential and supervisory requirements for
credit intermediaries
• registration and authorisation
• professional requirements
• APR – lift from CCD
• EU Directive on responsible lending and
borrowing expected in early 2011
• BUT is there a case for intervention at EU level?

18. Selling mortgages under MMR
• The future?
• delays in process
• standardisation of products across the market
• customer retention all important
• standard life of a mortgage to increase
• mortgages from a small number of lenders
• exclusion of non-deposit taking lenders
• bigger and bigger deposits
• mortgage queues
• remortgage market disappearing
• mortgage prisoners / social exclusion

19. MORTGAGE MARKET
REVIEW
John Lunn
26 October 2010
john.lunn@morton-fraser.com
0131 247 1066