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Subprime mortgages under fire By Emma Lunn
The subprime mortgage market has come under fire after the Financial Services Authority (FSA) announced enforcement action against five mortgage broking firms.
Subprime mortgages are sold to people with poor
Under FSA regulations, mortgage companies are meant to carry out a series of checks to establish whether this kind of home loan is the most suitable for the customer, if they can afford it and whether they would actually qualify for a cheaper mainstream mortgage instead. But, after examining the records of 11 lenders and 34 intermediary firms, the FSA found examples of people being signed up to mortgages they might not be able to afford. Poor record-keeping The FSA's findings related mostly to poor record-keeping rather than mis-selling, but it found weaknesses in advice and lending practices when it came to finding the right deal for customers. Some borrowers were advised to remortgage - and so incur early redemption costs - without it being clear that this was the best option for them. Most damningly, in a third of the intermediaries' files reviewed, the FSA found an inadequate assessment of the customer's ability to afford repayments on a mortgage and in nearly half of files there was insufficient assessment of a borrower's suitability for a particular product. Meanwhile, lenders came under attack for failing to provide clear requirements for affordability and for not checking information provided by borrowers. Clive Briault, retail markets managing director at the FSA, said it was very concerned at the findings and that poor sales practices could lead to wider consequences. "It raises some important questions about the consideration given to affordability by lenders and intermediaries when undertaking this business," he said. "All mortgage firms must ensure they are treating their customers fairly by undertaking robust assessments of affordability and ensuring they have consistently applied lending policies." He added: "People should make sure they understand the risks, costs and charges when taking out a subprime mortgage, particularly at a time when interest rates are rising. They should also not be tempted to inflate their salary, which is a criminal offence." Widespread mis-selling When the FSA launched the investigation two years ago, there was concern across the industry that it could uncover widespread mis-selling. While this has not been found to be the case, the discovery of less than adequate record-keeping has prompted industry critics to voice their concerns. Ray Boulger, senior technical manager at mortgage broker John Charcol, says it's vital that the right mortgage is matched to the right borrower and that correctly assessing needs, affordability and repayment is even more vital when it comes to the financially vulnerable such as subprime borrowers. "Transparency is key in this market and without attention to detail, processes cannot be held properly to account," he said. Boulger also pointed out that more than 50% of subprime mortgages in the review had been arranged on a self-certified basis, a figure that is way in excess of that in the mainstream market. "As the FSA has highlighted, inflating income is a criminal offence and while there is no proof, one suspects that this may well have been the case in some, if not many, instances," he said. Subprime loans account for about 8% of the UK mortgage market and are worth about £30 billion a year. But as personal debt in the UK continues to grow and interest rates increase, the number of borrowers with a poor credit history is expected to rise. According to the Citizens Advice Bureau, debt problems are rising and housing debt is one of the fastest growing problem areas, increasing by 20% between 2004 and 2006. The FSA concerns come at a time when the US subprime mortgage market is in crisis with rising defaults and repossessions. Critics fear the same issues could arise in the UK. However, there are fundamental differences between the subprime market in the US and that of this country, including tighter lending criteria in the UK and the fact that home loans in the US tend to be at a higher loan-to-value ratio.
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