FSA Mortgage Market Review and the PRS

The FSA Mortgage Market Review rules will come into effect on 26 April 2014 and I have listed the FSA’s own summary at the bottom of this article for the avoidance of factual doubt.

Will these new rules have a direct effect on Buy-to-Let?

Technically no, as Buy-to-Let is seen as a commercial loan and does not fall under FSA regulations (except where you plan to live in the property yourself in the future, or have a close family member live in the property). However what you often see with non-specialist BTL lenders is the standardisation of mortgage policy across both residential and BTL loans.

The key fear for the PRS is the abolition of Interest Only mortgages, and apart from the fact that these are not being ruled against even in regulated mortgages the FSA are stating that Interest Only is a credible option where a repayment strategy exists. Many people would argue that as a business model the sale of property could be used as just such a strategy.

It has been widely reported that the MMR will be another negative factor on the recovery of the housing market, but in practice mortgages are already not generally available that do not fit the rules below, so this should will have little effect.

Overall I see little to fear for the housing market and PRS other than a formalisation of rules that have already mostly been adopted by a cautious Banking industry. If funding does become harder to source for the PRS this will be down I believe to the lack of appetite by Banks, and the inability by government to force them to lend rather than enforced FSA regulation.

If you have any other views it would be great to see your comments.

FSA Summary of the MMR regulatory reform package:-

Responsible lending

• Lender responsible for affordability checks.
• Income to be verified in all cases.
• As a minimum, committed and basic essential expenditure to be taken into account.
• Stress testing against future interest rate increases.
• Interest-only where credible repayment strategy.

Distribution

• All interactive sales (e.g. face to face and telephone) advised, except where the customer is a mortgage
• professional, or high net worth mortgage customer9, or business borrower10, where execution-only optional.
• Execution-only allowed for non-interactive sales (e.g. internet and postal).
• Requirement on intermediaries to assess affordability removed.
• Every seller required to hold a relevant mortgage qualification.
• Firms must act in the customer’s best interests.

Disclosure

• IDD replaced with a requirement for firms to disclose ‘key messages’ to the customer.
• The ‘trigger points’ for presentation of the KFI changed to reduce information overload for customers.

Arrears management

• The number of times fees for missed payments can be charged limited.
• The arrears charges and forbearance rules widened to cover all payment shortfalls.
• The costs which can and cannot be recovered through arrears charges clarified.
• Lenders prevented from removing concessionary rates because of payment problems.

Non-deposit taking mortgage lenders (non-banks)

• Risk-based capital requirement.
• Increase in quality of capital.
• High-level systems and controls to manage liquidity risk.
• Application on a solo-basis and not to firms in run-off.

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