New mortgage lending rules in the UK has given the Bank of England renewed confidence for policy decisions
Gaining control of the mortgage market has been key in policy decisions as any movement in rates affect home owners’ level of income, and if borrowing levels are excessive, the changes in these levels can be drastic, leading to high levels of debt, lower consumption and hence, reduced growth. So what are these changes in mortgage lending?
In 2009, a comprehensive review of the mortgage market was conducted, culminating in the Mortgage Market Review (MMR) which began with a Discussion Paper in 2009. In the pre-financial crisis, the regulatory framework for mortgage lending worked very well for some, however, not so well for others who experienced hardship. During its buoyant period, the mortgage market often provided a platform for lenders to grant borrowers the full amount of borrowing required with no deposit. This high risk practice signalled the downfall of this group of borrowers as many faced huge debt during the crash and the possibility of their property being lower that its original value. Further, many were allowed to borrow amounts in excess of their earnings leading them closer to the precipice once the inevitable occurred. Suffice to say, changes in the post crash era were needed.
The Mortgage Market Review has sought to change the lending framework by reforming the mortgage market to ensure it is sustainable and works better for consumers. Changes include the stringent checks which include the need for borrowers to satisfy lenders that they can afford a mortgage through evidence of income and expenditure and the removal of the requirement on intermediaries to assess affordability. It is no longer compulsory to provide customers with an Initial Disclosure Document (but firms can continue to do this if they wish). Instead, certain key messages about a firm's service must be given to customers. They can still choose to use intermediaries in this process, but lenders remain responsible. Lenders are still allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital. There are transitional provisions in the MMR that allow lenders to provide a new mortgage or deal to customers with existing loans who may not meet the new MMR requirements for the loan. The borrowing is not able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases remains with the lender.
So what does this mean for the Bank of England and their policy decisions? In a framework where mortgages were easily granted under a regime of relaxed rules, the mortgage deviation proved to be too great. Simply stated, some borrowers’ mortgage repayments remained within their financial means should a change in policy occur whereas others would be rendered financially unviable under the same policy change simply due to the overstretched borrowing and mortgage advances by irresponsible lenders. The new rules ensure that the Bank of England has gained greater control to a large extent and should amass confidence that changes in their policies should not affect borrowers drastically. It is, however, too soon to say whether these measures will work, however, a survey of mortgage lenders recently found that the vast majority had confidence in the rules and should lay a platform for a more stable financial environment.
Recently, there have been calls for the MPC to raise rates and the consensus is that the rise is not too far away. In the longer term and with a greater hold on the mortgage market, the MPC’s concerns when raising the benchmark rate would be the effect on inflation rates, competitiveness and growth rather than the previous and current consumption and debt issues which have been a continuing problem in recent years. In the new framework, the MPC is able to better judge the market. There is still a requirement for home building required to increase the supply of home ownership which would indeed alleviate the house price rise problem – an issue which is in direct conflict with the UK’s economic situation, however, we must not deflect from what has been a positive move in the mortgage lending market which only assists to provide a stable environment in an economy still emerging from several years of recession.
Dr. Victor Chukwuemeka
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