Regulator to ban 'liar loans'

Regulator to ban 'liar loans'

The City watchdog is set to impose an outright ban on the self-certification mortgages many blame for driving the house price bubble and ultimately the credit crisis.

The Financial Services Authority (FSA) is reportedly set to outlaw the mortgages by introducing a rule that forces lenders to insist on evidence of income.

The move on so-called 'liar loans' will form part of the regulator's mortgage review, due out next week.

Initially designed to allow the self-employed and others with less predictable income access to the mortgage market, the mortgages became more widely sold as house prices pushed ahead.

Many borrowers who had been shut out of the mortgage market on industry standard income multiples were instead offered self-certification mortgages allowing them to borrow as much as five times their income.

HBOS and Bradford & Bingley were among the biggest lenders in this market and were eventually forced to ask for taxpayer handouts to help them as they struggled under the burden of their deteriorating loan books.

An FSA report earlier this year suggested that, in 2007, some 45% of mortgages were advanced without a check on the borrower’s income. The mortgages accounted for about £100 billion of the £300 billion that was lent.

The credit crunch, falling house prices and a surging number of households in negative equity means all but one high street lender has already stopped writing this type of loan.

But the regulator is set to step in to make sure the practice doesn't return even if house prices show a sustained recovery.

In March, the chairman of the FSA, Lord Adair Turner suggested it might be necessary to cap loan-to-value or loan-to-salary ratios in an attempt to stop the housing market overheating in the future.

Market watchers think that is a step too far for the regulator which will bow to industry pressure which has suggested first-time buyers would struggle to get a loan if such rules were put in place.

citywire.co.uk