Self-certification mortgages set to be axed

Published 14th Oct 2009

FSA's mortgage market review, due next week, is expected to require borrowers to produce proof of income in order to secure a mortgage


Controversial self-certification mortgages, which allow borrowers to apply for loans without proving their income, are set to be outlawed by the Financial Services Authority (FSA).

In a discussion paper due out early next week, the City watchdog is expected to propose the rules be changed so that would-be borrowers must provide proof of their income, such as previous payslips, before being granted a mortgage.

This would amount to effectively banning self-cert mortgages, which have been dubbed "liar loans" because they allow borrowers to state how much they earn without being required to produce any proof.

The deals were originally designed to help workers such as the self-employed, IT contractors and other freelance workers whose incomes are irregular, but they have been hugely controversial. During the property boom many borrowers, including those with full-time jobs, were able to inflate their salaries to obtain bigger home loans, and many people on these deals are now in financial difficulty.

The FSA believes the move away from checking people's incomes was a key factor in the problem of irresponsible lending. The proposals on self-cert mortgages will be a central plank of the FSA's long-awaited mortgage market review, which will discuss all aspects of the home loans industry.

However, they are likely to prompt a debate about whether banning people from self-certifying their incomes will mean that those whose income does not fit the standard pattern will be unable to take out a mortgage.

Such people are already virtually frozen out of the market: there are hardly any lenders still offering such deals. On Friday Nationwide's specialist arm, the Mortgage Works, became the latest lender to pull out, leaving only one lender of significance in the market: Platform, a division of the Co-operative Bank, said today that it "remains committed to offering products".

Working for the clampdown

In a speech in May the FSA's retail markets managing director, Jon Pain, flagged up that the regulator was looking at clamping down on self-cert mortgages. He said that in 2007 45% of all mortgages were made without a check on the stated income.

"Given that so many self-certification mortgages have been sold … and so many of them are now in arrears, should there be more constraints on this type of lending?" he said at the time.

"We will ask whether we should change our rules to require income verification for all mortgages, with lenders required to verify the plausibility and authenticity of the documentation provided by the customer before an offer is made."

Darren Cook, a spokesman for Moneyfacts, the financial data provider, said the demise of the self-cert home loan began shortly after the start of the current mortgage crisis, as banks and building societies introduced stricter lending criteria and began to shy away from higher-risk loans.

He added: "It is likely that a ban on self-certification mortgages will also signal the end of 'fast-track' mortgages. Many lenders used this process where proof of income was not initially required but they reserved the right to see evidence at any time."

Source: ' Guardian '

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