MMR: Affordability : what are the hotspots?

In my MMR article  in the March edition of Mortgage Finance Gazette, I mentioned how, as lenders continued to digest the 700 odd pages of the CP11/31, three key topics appeared to be the hotspots:- affordability and income verification; the advised only sales process for the majority of applicants and, hovering over all; what and when the impact of the EU directive  will have on the UK mortgage market.

Leaving aside the proposed EU regulation – which I covered in an earlier blog on Finextra – I will look at the issues that arise when you examine the practicalities behind the new rules on affordability, income and expenditure validation.

Some lenders have jumped straight into the deep water and require a level of detail which cannot have been the FSA’s real intention. Even to the level of asking how much is spent on Christmas and birthdays! For someone looking for a modest further advance the new demands must seem onerous and overly detailed, compared to say a £14,000 car loan where typically only four questions are asked about income and expenditure.

The requirement appears simple – a lender must verify income and be able to demonstrate that the mortgage  is affordable, taking  into account  the borrower’s net income and, as a minimum,  both  the borrower’s committed  expenditure (which includes the mortgage payments)  and basic household expenditure, along with basic quality of living costs.

Rather than resort to extensive form filling, lenders should still be able to model such income and expenditures and the main Credit Reference Agencies (CRA); Call Credit, Experian and Equifax are already revamping and enhancing their affordability and indebtedness services.

The FSA quite clearly states that “the lender must establish the costs, either using actual customer-declared information, or estimated modelled data… that is appropriate to the particular household”. However items such as ground rent and service charges – which must be included in the “basic essential expenditure” affordability assessment – could challenge statistical models as they have wide regional and even urban variations. A standard agreed formula would make things easy for the consumer and the lender. I am sure this is a topic raised in many lender responses to the consultation.

In respect of automated income verification, there are a number of services available from the CRA agencies ranging from bureau derived income models, verified application income to perhaps what is now the “platinum standard” for income verification, only available to those lenders who have current account data sharing agreements in place, whereby current account credit turnover information is available to enrich the statistical and application based data to provide a robust verification of income.

The FSA needs to ensure that such services and methodologies are allowed to be used in a prudent manner relevant to the credit risk. That will afford the consumer with an acceptable and agreeable experience that is not snared up by onerous amounts of questions and data in what is already the most complex consumer buying experience.

In the summer or possibly later we should see the final rules and hopefully a clarity which allows lenders to lend and consumers to buy mortgages.