Latest mortgage market reforms revealed

The Financial Services Authority (FSA) has revealed the latest proposals of its Mortgage Market Review in a bid to prevent a return to the risky mortgage lending seen during the boom.

A consultation on the proposals laid out in the review is open until 30 March 2012. The proposed measures are designed to ensure that prospective buyers get the right advice and information at the right time, and to ensure that lenders check whether borrowers can afford the repayments they are signing up to.

The original proposals have been amended following feedback from lenders, consumer groups and other stakeholders, and this latest round are now open to opinion. There are three principals at the core of the proposals, which are:

• Lenders must assess affordability - no more self-assessment mortgages
• Any assessment should account for future interest rate increases
• Interest-only mortgages should be assessed on a repayment basis.

Commenting on the proposals, Lord Turner, chairman of the FSA said: "We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.

"The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be - how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.

"The estimates are inherently uncertain, but they suggest that the new rules would have only a marginal effect in current market conditions - and particularly so for first time buyers - but would act as a significant constraint if market practice were in danger of returning to the 2005 to 2007 pattern. That pattern of effect would be a highly desirable one. We are however particularly keen that lenders provide their detailed assessment of the likely impact of these proposed rules. Then the FSA will be able to make appropriate final decisions."

Welcoming the revised proposals, director general at the Council for Mortgage Lenders (CML), Paul Smee said: "Lending needs to be responsible and done in a way which protects consumers. Rules need to be practical and avoid unintended consequences. Whilst there is much detail to be pored over, the FSA's new proposals seem to strike broadly the right balance. If lenders are to make their contribution to improving the supply of housing and to the wider agenda for economic growth, then they need a regulatory framework which also supports that objective."