Banks conflict FSA over plan to anathema liars loans

Rebecca OConnor, Property Correspondent & , : {}

The Financial Services Authority is facing fierce objections from some of Britains biggest lenders over proposals to ban self-certified mortgages.

The City watchdog said that large banks and building societies had opposed a ban on the so-called liars loans that allow borrowers to state their own income without documentary proof, because it would be unfair on the self-employed and could lead to an increase in mortgage fraud.

The loans, which accounted for half of all lending at the peak of the housing boom in 2007, were blamed for playing a large part in the resulting collapse, after borrowers who had overstated or lied about their income on applications subsequently defaulted on repayments.

In a feedback document published yesterday, the regulator said that most lenders had also objected to a proposal to cap the maximum loan-to-value limit for home loans. Banks, which typically earn higher-than-average margins from riskier mortgages, argued that a ban on high-risk borrowers would be a blunt and inflexible measure that would disadvantage some homeowners and penalise the whole market for the toxic lending of a minority. Instead, large banks said that tighter affordability assessments and more regulatory supervision of high-risk lenders would be less intrusive and better targeted than an outright ban.

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However, consumer groups, small lenders, brokers and trade associations supported the ban and argued that everyone should be able to verify income, even if the income sources are diverse or the income streams irregular.

David Hollingworth, of London Country Mortgages, a broker, said: The proposals run the risk of leaving borrowers out in the cold, while imposing a cap on loan-to-value limits could penalise first-time buyers. You would hope that the market should be able to self-regulate in this regard, as it already has been doing.

The critical response will come as a blow to the FSA, which announced its intention to review the mortgage market last October. The regulator first looked at the loans in 2003, when they accounted for 20 per cent of the market, but ruled out a crackdown.

The latest objections are likely to delay or derail the introduction of any new rules. We will not rush into making or implementing rule changes without first fully assessing the potential impact on the market, the regulator said, adding that it would look again at affordability and income verification in the autumn.

• Average house prices rose 0.3 per cent to 158,100 in March, according to figures from Hometrack. Growth was likely to remain muted as a result of more properties coming on to the market, the property data firm said.