The FSA has now bared its teeth regarding mortgage regulation. However, it is not just the banks and mortgage brokers who are weighing up the impact, now the self employed and anyone with a self certified mortgage are potentially staring down the barrel of a gun.
In the middle of this are real people who may soon feature on TV news programmes, as desperate to refinance or trapped by an existing mortgage and unable to move. Will the Citizens Advice Bureau take up the plight of the self employed with the equal vigour they applied to their 'Super Complaint' about Payment Protection Insurance? It is only hoped the deafening sound of the regulatory stable door closing, long after the 'self certified mortgage horse' has bolted, will now be matched by an equally loud chorus of voices demanding sense and reason. The alternative is the prospect of thousands of families being hung out to dry by the same regulator they judge to have been asleep at the wheel of the UK economy when it crashed in 2008.
When debating the blame game about who was guilty of lending irresponsibly, there is an elephant in the room, namely unemployment. Despite the vagaries of the property market, lender restrictions and a general shortage of finance, most people can ride this out when still receiving a regular income. However, once out of a job, finding themselves reliant on the pitiful level of state benefits is a shock. For the first time in their lives many realise with horror that they have little saved to fall back on. A recent Equifax survey reported that 1 in 3 respondents said they could only manage for one or two months before getting into financial difficulty if they lost their job.
This is the crux of the matter, until the current recession, most economically active people anticipated getting another job fairly easily. Having ready savings did not seem important. The alternative to meet their bills; Payment Protection Insurance (that includes Income Protection and Mortgage Payment Protection Insurance), was widely criticised for offering poor value. High sales commissions, publicity surrounding miss-selling drove many to simply cancel their policies. Due to all of these factors the market for this insurance shrank enormously, just before the current recession when people needed it most. Therefore, the over extended or just plain optimistic, suddenly found themselves in a financial 'perfect storm.' Those with self certified mortgages are set to gain nothing but more misery from the FSA.
Both lenders and the FSA need to address the unemployment issue for the future. If the lenders cannot see their duty extends beyond protecting their shareholders interest by securing the loan against the value of their customer's property, then the regulator might need to step in to address the wider implications. It is impossible for a UK Government to outlaw unemployment, however there is no reason why it's appointed regulator should not demand more in terms of lender due diligence before a loan is offered. They could make it a condition that the customer should be able to meet loan repayments if, through no fault of their own, the customer was out of work. At this time, a mortgage provider can quite legitimately make their loan conditional upon a house being insured for its full value in case it burns down. Why not apply the same logic to their customer having an insurance that could maintain their mortgage repayments?
Anyone who holds and maintains this insurance is a far better risk in terms of whether they continue to pay their mortgage, than someone who does not have this cover in place. So why not offer the best terms to those who choose to have this insurance?
The FSA have already set out industry standards to ensure people are able to buy this cover in an open and competitive market. The FSA, quite rightly, have remained determined to 'clean up' how Payment Protection Insurance is sold, now should be the time for consumers to benefit from their actions. Therefore, to meet the crucial need to avoid mortgage/credit defaults, why not make the acceptance criteria for loans conditional upon the customer having the means to pay them back?
As recent unemployment driven debt has revealed, people may need their major bills paid if they are unable to work for up to a year. To have the ability to repay a loan for 12 months made a compulsory precondition to any good loan offer may, or may not, require the customer to take out Income Protection Insurance. The Equifax survey suggests only the minority of people have funds to pay their bills from their own resources, therefore Income Protection cover would offer them a ready made answer to meet this criteria.
Could the FSA grasp this opportunity to address an acute need to keep people in their homes and free from credit black listing? The alternative is to force lenders to meet the cost themselves. This will simply mean sapping yet more liquidity from the market as lenders increase their provision for loan defaults.
There have been representations to the Government in the past to make Income Protection Insurance compulsory in the UK. This was ill conceived simply because it would be too big with too many exceptions. There is nevertheless the opportunity to target some simple regulation where it would do most good, for the very people who need it most. The FSA regulation of Payment Protection Insurance and its short term Income Protection derivative, arrived too late for the start of this recession. However, the FSA can now capitalise on their work by changing lender criteria to accept holders of Income Protection Insurance as a precondition to being offered the best loan terms. Providers are willing to offer this insurance, will the FSA shy away from using their authority to deliver this genuine benefit to the British public?
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