The mortgage market is to see "major reform" which the Financial Services Authority hopes will prevent a similar housing crisis from occurring and rocking the economy in the future.
The FSA is to adopt a "more intrusive and interventionist style of regulation" as part of its overhaul of the mortgage market, to "ensure that it works better for consumers and its sustainable for all market participants."
The new proposals, published in the FSA's mortgage market review discussion paper, include imposing affordability tests for all mortgages, and making lenders responsible for assessing a borrower's ability to repay their home loan; all mortgage advisors will also become personally accountable to the FSA.
All borrowers will have to prove their income, including the self-employed, so self cert mortgages will become a thing of the past; there will be a ban on charges for customers who go into arrears and lenders will not be allowed to profit from borrowers who have fallen into arrears.
The FSA is also calling for an extension of its scope in the mortgage market, to include regulation for all buy-to-let mortgage lending secured on a home, not currently regulated by the FSA.
Commenting on the proposals, Jon Pain, FSA managing director of supervision, said that the FSA recognises that some borrowers have suffered "great financial distress" as a result of the recent upheaval in the mortgage market, and sees that the system needs to be changed so that it works well for all consumers.
The report "clearly shows a rapid explosion in mortgage products" he said, such as "the emergence of high risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end."
He stressed that the role of the FSA needs to include ensuring that lenders only offer a mortgage to people who can afford the repayments. "The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms," he promised.
The FSA is prepared to introduce further change if the measures announced today do not have the intended effect, such as placing caps on loan to value, loan to income, and debt to income ratios.
Implementation of the measures will be spread out over a period of time, with priority on those areas which present the most risk to consumers, such as arrears. The paper is out for discussion until 30 January 2010, while the FSA seeks feedback from the mortgage industry and consumer groups.
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