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The communist state is alive and well in Canary Wharf

Regulatory comment for financial advisers

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.

Footnote: 

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?

 

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Comments (11)

My existing Fixed Rate Mortgage deal comes to an end in July and so, in advance, I contacted my Lender to see what new Fixed Rates would be available to me after July. Quotes were provided in March and I selected a 4 year Fixed Rate and signed the documents to reserve the deal on 24th April 2014.

The paperwork was received at the Lenders H/Office on the 28th April 2014 [2 days after MMR went live]. Last week they rang to say that the offer was no longer valid and that I would now have to go through the full process as the new MMR Rules applied.

However, the paperwork was signed and sent 2 DAYS prior to MMR and when queried the Lender stood firm on their understanding that the new rules are applied retrospectively on all mortgage offers received BEFORE MMR.

So, 45 minutes later I was then offered a new Fixed Rate deal - which was exactly the same one that I had originally signed up to.

Derek Jones   06/05/2014   11:53
No in this case I think you are (Not unusually) entirely wrong. How you can imagine that this is akin to Communism defeats me. It is pure Capitalism – don’t borrow if you can’t repay. No more nannying. You will not get a lolly is you don’t have the money and the State will not bail you out.

Mr Wheatly clearly said that the rules are there to ensure that those taking a mortgage can afford the repayments. It is an absolute given that when the rates increase many people will be in serious difficulty.

Indeed the financial problems in 2008/9 where in no small part due to people having mortgages that they just couldn't afford.
I don't absolve the lenders of blame - they too were culpable. We all know that anyone who could stand unaided and breathe for 10 minutes got any amount they applied for. Madness. We are now starting to get back into the realms of reality.

Yes, I agree if I were making the rules I would have just reverted to MCCB rules which seemed pretty sensible. Allied to X3 single earnings or 2.25 joint with a MIG and a 20% deposit as basic minimum requirements.

The questions are framed precisely to ensure that after the mortgage has been granted people will still have sufficient surplus income to meet their obligations. Unfortunately we now live in a society that thinks debt is the norm and that there is no shame in being heavily in debt. We have our governments to thank for this and our Regulator is fighting against the tide. (Personally on this – I hope they win). Perhaps the reintroduction of credit control would be helpful, but that is as likely as Mr Cameron (and any of the others in Westminster) living in the real world.

The principle that those who borrow must be able to repay – in all circumstances - I think is incontestable. Back in the early 90’s rates went to over 15% and the majority of people still managed to cope – that’s because the correct hurdles were in place at outset.

Harry Katz   06/05/2014   12:21
The obvious effect of potentially making life more difficult for buyers will be to increase demand in the rental market -- which Ed Milliband at least intends to be subjected to even more controls and interference than recent legislation has introduced. If both rental and ownership markets are to be suppressed by more interference by State and Regulation then how is the lack of housing crisis going to be improved ?

Frank Dennis   06/05/2014   12:29
Incidentally -- Since someone who rents but cant pay is subject also to potentially losing their home, but without any equity, how long before some bright spark suggests that tenants should be subject to the same stringent credit checks ? If the same rules applied to renting as to mortgages then what next - affordability rules for cardboard boxes to sleep in ? (mind you - should not really give some people any more bright ideas should I ??)

Frank Dennis   06/05/2014   12:35
Good grief Dennis

What landlord wouldn't make searching enquiries as to the solvency of a prospective tenant?

As to rent control, well I’m no Socialist but on this occasion Milliband has it half right. There should be some kind of control for long term tenants like there is on the Continent – where rentals are much more common and tenants are protected.
I guess that this should have a threefold result:
1. Provide security for tenants and thereby encourage more rentals.
2. Discourage the amateur BTL investor, thereby possibly cooling the housing market somewhat.
3. Providing the professional investor with long term rental income, less voids and better tenants.

Harry Katz   06/05/2014   13:11
I have to agree wholeheartedly with Frank Dennis as well as the general tenor of the above article - Mortgage Regulation is now bordering on the obscene.

My own 32 year old son is trying to become a first time buyer and is considering emigrating to Greece instead! SERIOUSLY.

Where is the logic in telling someone that he cannot afford to pay £450 per month for a mortgage for 30 years, and thus forcing him to pay £650 per month to rent the same property that they say he cannot afford to buy? is it I that is being perverse here?

And why should he be refused an interest only mortgage for £350 per month anyway! How is he or anyone else worse off, if after 30 years he cannot repay the original loan? If he had been renting for all those years he would have paid dramatically more and still have nothing anyway! On an interest only purchase it is more affordable AND there is a very high probability that he will have a very significant equity share established to enable him to secure another property after 30 years.

There is also the strong likelihood that he will have been able to make capital repayments over that time -- should he choose not to, then why should he be refused the right to this route by some parasitic regulator who has little or no comprehension of the real world outside of Kensington!

Grosvenor   06/05/2014   15:48
@ Grosvenor

Don't let your son consider for much longer - advise him to go ASAP. Personally I advise anyone under 40 to emigrate (although I'm not too sure about Greece).

Latest reports seem to indicate that in another 20 years we’ll have a larger population than Germany in a country some 1/3 smaller (provided Scotland stays in the UK). Overcrowded? And how!

A 30 year loan is madness - he is committing to be in debt until he's 62 - and possibly beyond. Nice way to make banks rich.

There is of course another potential upside. If your son still has a student loan hanging over him – that will in effect disappear when he leaves. And of course the climate is so much nicer in Greece and you will have somewhere nice to visit, instead of some suburban box in the UK.

Harry Katz   06/05/2014   16:13
What landlord wouldn't make searching enquiries as to the solvency of a prospective tenant? Have you heard of student lets Harry ??(or is it Katz - but I forgive you for not getting at least my name right !!-- where are the "smileys" on this site ??)? ---- of course there are not such stringent checks for rentals as in the mortgage affordability rules now imposed. If you are really are correct in suggesting that the rules apply equally (though there are no Regulatory affordability rules imposed on prospective tenants of which I am aware -- simply common sense and credit checks on most occasions) then if someone does not qualify for a mortgage and the rental market applys the same criteria --- how are they to find somewhere to live ??

Frank Dennis   06/05/2014   20:38
Apologies Frank (Dennis!)

Students - parental deposits are the norm for my clients who have investments in this area.

Likewise for ordinary tenants - usually a three month rent as deposit makes some of the checks redundant - provided the rental agreement allows eviction in within the term.

Harry Katz   07/05/2014   10:44
Prior to 2008 we used to complete 20 - 30 mortgages a month with an ave LTV of 60% @ £90k borrowing, good quality low risk lending for the institutions. We had a mortgage system (from multiple high st lenders) able to issue offer letters within 3 days - 21 days all completed with none or minimal cost to the customer.

However the regulators, banks & government have taken advantage of the economic climate to create the farce forced upon us by this inept entity now?

So I for one have decided to stop advising on mortgages, further advances et al, Unfortunately to the detriment of our clients. All due to the obscene levels of bureaucracy, time, ineptitude of the MMR & the continual changes of lending criteria & policy by the lenders. (4-8 weeks if were lucky for an offer letter)

So because of the unrealistic, problematic, short sighted, petty minded bureaucracy forced upon us & the industry combined If we all took a stand & said thanks but no thanks how long do you reckon this would take to get BIG BROTHER to take notice

David Hatton   08/05/2014   01:02
MMR = TCF !
MOTHER APPLIES FOR A £25000 MORTGAGE FOR A PROPERTY FOR HER MMR EXCLUDED SON, 6 MONTHS LATER LOST FIRST PROPERTY AS LENDER TOOK TOO LONG TO OFFER, WE ARE NOW FACED WITH LOSING THE SECOND MORE EXPENSIVE PROPERTY AS LENDER HAS STILL NOT ISSUED OFFER ( 31% LTV)!

John Miller   30/05/2014   19:21

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