Opinion on current trends or market issues

The Mortgage Market Review: what are the implications of increased regulation?

Katherine Meredith

After many rounds of consultation, the FSA published the final iteration of the Mortgage Market Review (MMR) on 25 October.  During the consultation period the mortgage market has tightened risk and indebtedness criteria for new lending, not to mention reduced Loan to Value percentages; moved out of Self-Certification mortgages and in some cases ceased to lend on Interest Only terms. As Martin Wheatley (Managing Director of the FSA) states - the aim has been to ‘ensure these principles are hard-wired into the system to protect borrowers’.

The MMR will not change who will be lent to, but rather prescribe a more robust approach to income verification and affordability assessment. This will require a move away from the use of income multiples, to a much more granular approach to affordability assessment. If current methods are utilised, this will result in a significant increase in the information required on application forms; much longer elapsed times to make verification checks in order to reach a decision; and therefore increased cost and resources for lenders to assess a mortgage applicant.

The MMR doesn’t just cover new lending; it also requires an in-depth affordability assessment to be made at key points within the life of a mortgage, such as a change in repayment terms or extending the term beyond expected retirement.

Meeting the requirements of the MMR whilst improving customer service requires a movement away from manual, paper-based processes towards a more analytical approach.

The MMR requirements

An Affordability Assessment - lenders must verify income information provided by the consumer, one option for doing so is to estimate income using information such as the current account credit turn-over or other bureau variables. Against this, the monthly mortgage or rent payment is off-set along with payments on credit commitments and basic house expenditure; all of which require some degree of validation.

Interest Rate Stress-Test – within the affordability assessment, lenders will be required to take account of the potential impact of rising interest rates on mortgage payments.

Interest Only Mortgages - lenders must assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment i.e. a repayment vehicle; it’s not sufficient to rely on rising property values at the end of the mortgage term. This applies not only to mortgages sold as interest only, but also to those converted to interest only repayment terms as a result of forbearance measures.

One step ahead in affordability assessment

An analytical, bureau based affordability solution gives clarity on a customer’s current financial position and how it might change in various economic scenarios. Affordability metrics such as Effective Disposable Income (EDI) based upon a consumer’s bureau position, allow lenders to be consistent with the requirements of independence laid out in the MMR whilst achieving a more accurate, timely and independent view of affordability.  This is especially valuable as customers have a tendency to over-estimate income and under-estimate expenditure; and the whole process of taking a consumer through an income and expenditure questionnaire is time consuming.

Early warning of potential affordability problems

The MMR not only requires an affordability assessment at the point of new lending, but also when forbearance for a customer is required.  At the point where a mortgage hasn’t been paid for several months, the customer’s affordability position is likely to limit the options available. The earlier a warning sign is identified of a trigger event (such as the loss of a job) or increasing financial stress, the greater the range of forbearance options open to lenders.

Transition to full compliance

Becoming compliant with the new mortgage regulations, whilst maintaining a competitive advantage and improving customer service will require fresh ideas, innovative thinking and new ways of working. Experian’s range of bureau based affordability and trigger solutions can help and while the current solutions meet the needs of lenders to increase efficiency and comply with mortgage reform, Experian is always looking for ways to make them even better.  Ideas under discussion include the possible development of an MMR bureau block that brings all the elements of Income Verification, Effective Disposable Income and Affordability together into one place.

The final publication of the Mortgage Market Review makes clear the new requirements for lenders, meaning they can assess the changes they have already put in place and develop detailed strategies for full transition.

Katherine Meredith
Head of Business Intelligence

Heading the Business Intelligence Group, Katherine has responsibility for the benchmarking consultancy service, Market & Portfolio Insight; With over 20 years of credit risk experience she provides insight into the consumer credit market trends, working with clients to develop their strategy from market opportunities for growth to assessing the impact of lending policy upon loss forecasts.


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