The FSA's Mortgage Market Review discussion paper was published yesterday, 19 October, setting out its proposals for the major reforms for the UK mortgage market. Download the Review by clicking here.

At a time when the property industry is desperate for an easing of borrowing restrictions, these proposals look set to squeeze the market even further. They cover a range of measures to ‘improve mortgage lending' - but most of them start with the word ‘banning'.

Banning ‘self-cert' mortgages; banning the sale of products which contain certain ‘toxic combinations' of characteristics that put borrowers at risk; banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears... is it a hammer to crack a nut? Is it spin? Is it the end of property ownership as we have come to know it?

Mortgage lenders will be forced to make full checks on the incomes of all borrowers; those checks would include careful assessment of regular income and variable or insecure earnings, ending ‘self cert' mortgages, referred to by some as ‘liar loans'.

While this makes sense on paper, especially if you have enjoyed steady salaried employment for the last 20 years, it will ruin any chance that many people, particularly the self-employed, would have of getting a mortgage.

Peter Williams, Intermediary Mortgage Lenders Association executive director, says, "Although the FSA admits to some of its own errors, it is playing to the gallery by heaping blame on non-banks and non-income verified lending as being at the centre of the market's problem. This is too simple an argument. Non-banks weren't the dominant lenders in the markets in which they operated and non-income verification lending was underpinned by credit scoring systems. Non-banks play an important role in the UK mortgage market and a regulatory environment which makes it difficult for them to compete will only be detrimental for consumers and for innovation in the marketplace.

"The use of credit scoring as an alternative to income verification reflects the much more complicated assessments required in this process than simply proving how much income a person has - as the FSA's paper makes very clear."

Can you afford it? Prove it!
And it's not just those needing self-cert mortgages who will suffer. The proposals also include the imposition of affordability tests for all mortgages; lenders will be ultimately responsible for assessing a consumer's ability to pay. This will inevitably curb any lending that could possibly be seen as over generous and seriously affect the availability of mortgages.

NAEA chief executive, Peter Bolton King, said, "Much of the extreme lending being done pre the credit crunch, was clearly not sensible. However, with the market picking up alongside a shortage of lending we need to be careful not to deter consumers nor give banks an excuse not to lend money. We are unsure on how these new procedures will roll out, yet in light of the demise of the stamp duty holiday and the inevitable rise in VAT we must take a sensible interpretation of these guidelines and find the right balance. If these guidelines take us to the opposite end of the spectrum they could do untold damage to the housing market, which is currently showing promising signs of recovery."

No more reckless lending!
But nobody wants to see a return of reckless lending; FSA chief executive Hector Sants said. "There are clearly certain types of loans which should not be made and there are clearly some consumers who should not place themselves in a position where they wouldn't be able to repay that mortgage in the future," James Moss, director at Curzon Property, agreed but said: "It's a shame the FSA has taken four years to make a very obvious decision. If they had acted quicker, the thousands of families who had their lives ruined by taking on mortgages they couldn't afford would have been much better off."

The FSA want their remit extended to cover all lending for buy to let, a hugely popular product that has largely disappeared over the past year; when the BTL product does come back it will be FSA regulated. Liz Peace, chief executive of the British Property Federation, said: "We welcome the move. It's great that the FSA has finally woken up to the fact that buy-to-let mortgages need to be regulated as with every other mortgage type."

Nanny state - again
The Council of Mortgage Lenders welcomed the discussion paper, but said that they found it interesting to see the FSA note that it believes regulation cannot rely on the notion of borrowers behaving rationally - that is, in their own interests - and that the regulator may instead need to introduce measures to, "protect consumers from themselves".

It is important that the principle of consumer responsibility is not lost in such a regulatory environment, as it is a basic tenet upon which transactions of all kinds between firms and consumers rely.

Michael Coogan, CML director general, said, "We agree with the FSA that regulation in itself cannot resolve the problems of the recent market. However, we also agree that clearly delineated responsibilities, which remove regulatory ambivalence, will help lenders, intermediaries and consumers to know where they stand, and to accept the consequences of their actions.

"As always with regulatory change, the devil may be in the detail. But we welcome the consultative approach, and look forward to working with the FSA to ensure that the objective of regulatory fairness between lenders, intermediaries and consumers is achieved in practice."

The industry has until 30 January 2010 to comment on the plans.

Now is the time to speak up, so if you would like to comment and for your views to become part of a feature to be published in PROPERTYdrum Magazine, add your comments at below or email the Editor, Sheila Manchester at sheila@propertydrum.com.