This weekend we will see rockets shooting high into the air leaving a trail of sparks behind them.  Hopefully, the mortgage reforms being discussed at an international and European level will not leave a trail of sparks behind them which could damage the UK mortgage market even further.

The blue touch paper which ignited the current review of mortgage credit was lit a long time ago by the European Commission, well before the UK first introduced mortgage regulation. But things are beginning to ‘heat up’ now as Member States discuss the EC directive on mortgage credit, whilst the FSA are concerned that some aspects of the proposal will cause difficulty for many UK stakeholders.

As you are no doubt aware, at the end of March this year, the EC published its Directive for credit agreements secured on residential property and earlier the same month, the Financial Stability Board produced their review on residential mortgage underwriting and origination practices. At a local level we have the FSA’s review of the mortgage market, which proposes various changes that will affect mortgage sellers (both intermediary and branch based) and the mortgage sales process.

All three of these proposals aim to increase the protection of consumers by making sure the mortgage lending market is working in their favour. However, they sometimes differ in their view of how this needs to be addressed.

As I mentioned earlier, the EC Directive has been several years in the making, beginning during pre-credit crunch days with its original objective being to harmonise the way all EU countries deal with mortgage lending, conveyancing and valuations. But since the financial crisis, the Directive has taken a change of direction as the EC have used the credit crunch to add weight to the need for the mortgage directive.

Its proposals now focus on the legislation of the provision of mortgage credit, the advice and pre-contractual requirements with the emphasis on consumer protection. These proposals could ultimately lead to a more prescriptive approach in some areas of mortgage lending in the UK.

Explanations on how the FSA’s activity on mortgage regulation is ‘alive’ to all the developments both internationally and in Europe, were provided by Shelia Nicholl, (Director of Conduct Policy at the FSA) during the Council of Mortgage Lenders ‘MICE’ event on 3rd November.

One of the first things she highlighted during her speech was that the FSB report had concluded that differences in national real estate markets, culture and socioeconomic policies meant that internal standardisation is not the answer. And she stressed that this should be considered for the proposed European legislation, as “imposing a prescriptive approach that doesn’t fit with different national characteristics will only result in significant cost while potentially denying access for many borrowers.”

There are a number of areas that the FSA agree with in the Directive, but there are contentious issues such as new consumer rights applicable to all mortgages that could be made mandatory across all Member States, for example the right to transfer a mortgage to a another borrower.  If features such as this became rights it would mean that consumers, who don’t want to take up any of the new rights, would still end up paying for them.

In the Directive the EC suggest that the setting of Loan to Value (LTV) and Loan to Income (LTI) thresholds could be used by Member States as guidance for lenders to use when assessing credit worthiness, and the FSB believe they control the lenders exposure to loss if a borrower defaults.  However, in the Mortgage Market Review consultation papers, the FSA have stated that they don’t propose to set maximum LTVs or LTIs, though this view may change as both the EC and, to some extent, the FSB seem to be supporting the idea.  In my opinion it could mean that the FSA may decide to adopt this mechanism as a way of protecting specific customer groups or types of products for example first-time buyers or equity release products.

So, this rocket has three trails of sparks flying behind it which are made up of the remedies being proposed to mitigate any further global contamination: the FSA’s MMR delivering the changes they believe are needed to UK mortgage regulation; the EC sparks that are pushing for the prescriptions contained in their Directive; and the third spark implementing the principles as suggested by the FSB report on mortgage underwriting and origination practices. 

Will the three proposals deliver an impressive burst of colour and new life into the mortgage market, or will the rocket propelled with mortgage legislation fall about us like a damp squib?