2 May 2014
The new rules for mortgages have arrived and already we are hearing examples of the problems it is causing and undoubtedly will continue to cause until the Polit bureau in Canary Wharf give some credit to those who may wish to decide for themselves if they are able to take on mortgage responsibility and for lenders to make a decision as to whether they want to lend based on better relevant assumptions than lifestyle choice influencers that can easily change after the event when the ‘deal’ is done.
Martin Wheatley, with an air of almost cavalier smugness reckoned that everyone might want to "have an expensive house in Chelsea but they should realise that they cannot always afford to do so".
Regulation of the mortgage market is London centric induced, regulators see the London market overheating, demand exceeds supply, they see the extreme borrowing needed to get on the housing ladder in London but what about the rest of the country? There are nowhere near the same crazy price issues, income to LTV ratios etc yet the regions will suffer for the sins of the Londoner.
So now, for the very first time we have a regulator deciding what someone can or cannot try to aspire to. It is lifestyle engineering that will grant mortgages to individuals who can then go and spend their money on gym memberships, beauty treatments, car purchase, cosmetic surgery, eating out, exotic holidays, tattoos, the spend list is endless. But only as long as it is done after the mortgage is drawn down.
That is not what regulation is for. Lifestyles change, incomes change, aims and aspirations change and regulation was not set up to protect people from themselves in deciding lifestyle change. It was set up to ensure that products are fit for purpose, that the costs are fair and the beneficiary is the consumer.
Wheatley said "In the past too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that,”
He is being somewhat disingenuous as there were many other factors that applied to mortgage lending decisions, good and bad. And he is also not taking into account that by far the majority of UK borrowers have been servicing their mortgages quite well and that many other factors, often caused by poor political governance, punitive taxation, poor regulation and a historic need for greed with some lenders, all of which can cause mortgage distress when none was foreseen.
The mortgage market has changed beyond all recognition over the last 40 years. In the simpler ‘seventies’ there was a mortgage famine, money could only be borrowed from building societies who you saved with, they had limited quotas of funds, lending decisions were made after face to face interviews, credit checks did not really exist and if the branch manager thought you were good for a mortgage and you had saved a reasonable deposit, you were ‘in the game’.
So, Wheatley is now saying "Our new rules will hardwire common sense into mortgage lending."
Common sense was there years ago and still is for the vast consumer majority in the UK. Common sense removal for some did take a leap out of the window the day that regulation allowed self-cert mortgages to be granted to those with little or no deposit- no skin in the game. And it has been removed again with these new rules.
Ray Boulger, from mortgage advisers John Charcol, told the BBC that while some of the checks were common sense, he thought some were unnecessary, he is right. He went on to say that in some cases the new rules will "have hard-wired insanity into it".
Sir Jon Cunliffe, deputy Governor of the BoE said that the tougher affordability tests and “lender constraints” brought in under MMR should “act increasingly as a brake on momentum”. However, he added: “Other outcomes are very possible and the Financial Policy Committee will need be both vigilant and ready to act.”
There will always be examples of unintended consumer detriment and distress generated by financial services products, but do we need Comrade Wheatley telling you what we can and cannot aspire to, what you can and cannot work for and what you can and cannot spend your money on if we want to get a mortgage and feel responsible enough to take that step?
Although the end regulatory result in some cases may be better lending, lenders caution to the new rules for fear of falling foul of the regulator will create side effects.
Product innovation will be stifled, there will be a huge group of disenfranchised wanna-be home-buyers unable to buy, some will not be able to remortgage to get a better rate on a mortgage they have been servicing well for years and the extra costs involved for both lenders (by way of increased regulatory cost) and borrowers (to whom it is passed on to as a cost of doing business) will simply not help.
The Council of Mortgage Lenders has warned of "wobbles" in lending during the months surrounding the implementation of the rules, but says it believes any impact should be modest.
Changes such as they allude to are already there in some ways it would appear, as Mr. Wheatley would wish, to protect people from themselves. This is akin to placing a town under night-time curfew because a few citizens are behaving badly.
Let’s hope the CML are right with modest bit. Something tells me that they will not be.
History is always a good place to draw on unintended consequences. In 2008 the treasury faced a £4.5 billion hole as house sales and the attendant stamp duty receipts slumped.
The Office for Budget Responsibility has predicted that house prices will rise by 8.5 per cent this year and by 7.8 per cent next year. As a result, the Treasury is expecting to benefit from huge inflows of stamp duty.
And regulators want to cool the market yet the treasury needs or feeds from the tax revenue from house sales??? It was £6.9 billion in 2012/13. Stamp duty revenues for this year are anticipated to be £9.3billion with the average home getting a £7.5k bill.
Is anyone talking to each other in government and regulation? Or do they not care as 40 per cent of the UK total residential stamp duty take was derived from non-residents, a higher proportion of which will buy high-value properties at the top end of the booming London market without needing a UK mortgage? In 2012, a 7% band for properties over £2million was introduced.
For someone buying a £3million house, the Government would ‘trouser’ £210,000 in stamp duty. These buyers do not have to worry about the cost of gym membership, visits to the hairdresser, spa treatments, car purchase, cosmetic surgery, eating out, exotic holidays, tattoos or buying a car resulting in their house buying dream shattered as their mortgage is declined.
This will be a dog’s breakfast for very many decent aspirational home buyers and a bonanza for compliance consultants and the regulation industry as it finds yet more ways to justify its existence and fund it’s extravagant socio-financial engineering stranglehold at the expense of those it is there to protect.
A tenacious Tory MP David Ruffley, has dug deeper into the FCA’s condoning of what he claims is a scheme to reduce tax for its senior employees.
Via an FOI request, he has uncovered “Animal Farm” style arrangements that could be saving thousands of pounds for staff at the FCA — while at the same time tougher Canary Wharf rules are brought in to make it harder for decent, tax paying homebuyers to get a mortgage.
Between April and December last year, 15 senior FCA employees earned their ‘wages’ — totaling £1.07 million through so-called ‘personal service contracts’.
He suggests that the FCA is behaving hypocritically in subjecting homebuyers to more scrutiny about their finances before they can obtain a loan, whilst allowing preferential sweetheart deals for its own workers.
These contracts mean that instead of paying income tax — which, assuming their salaries are above £150,000 is set at 45 per cent — they pay corporation tax at just 20 per cent. It also sees them escaping National Insurance contributions.
Critics claim these deals ‘avoid’ tax. Legal this may be. Not a good message to send out though……… is it?