The Financial Services Authority (FSA) is considered likely to impose stricter rules on mortgage lending by 2013.
The new rules are an attempt to keep a resurgence of risky mortgage lending at bay.
Chairman of the FSA, Lord Turner, said that the “excesses of the pre-crisis period have largely disappeared from the current market,” but that it is still important to set out definitive rules against wanton lending.
The regulator’s proposals will bring in “common sense” standards, mean to stop potential home buyers from borrowing more than they can afford.
The FSA is also putting it into official regulation that lenders must assess the affordability of homes better.
These new regulations are necessary, Lord Turner said, for when “memories of the crisis recede” and short-sighted lenders begin their “poor practice” again.
The first few years of the past decade saw mortgage lenders doling out huge home loans without thoroughly checking their borrowers’ ability to repay. This instability led to a housing market crash that has seen the number of foreclosures on homes increase from month to month.
One of the most notorious examples of the pre-financial-crisis “excesses” were the “Together” mortgages from Northern Rock bank, which granted loans of 125% of the value of homes.
Some borrowers gave mortgages worth 7 times a borrower’s income, while others allowed borrowers to exaggerate their real income with a “self-certified” mortgage.
These practices were dangerous, say the FSA, and continue to be a threat in Britain’s future.
The newest proposals from the financial regulators will be focused on ensuring that lenders properly judge their borrowers’ circumstances, risk, and ability to repay.
The proposals are currently going out into a further round of public consultation, but include clauses that will specifically make mortgage lenders keep “poor practice” from re-entering the housing market.
The FSA says that lenders should always assume interest rates may rise from their current low levels, and not let borrowers’ ability to repay rely on rising house prices.
Though the FSA is no longer proposing that every potential borrower undergoes a detailed check of their household budget and personal finances, lenders will still need to check income details in a mortgage application.
In addition, borrowers who have an existing loan that may be forbidden under new FSA rules (such as self-certified mortgages, or mortgages with a very small deposit) will not be prevented from remortgaging.