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The end for self-cert mortgages

FSA moves to ban loans with no proof of income
mortgage papers

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Self-certification mortgages, which were popular and widely available before the onset of the credit crunch, are to be banned under proposals by the Financial Services Authority (FSA). 

The FSA’s discussion paper examines the role of the mortgage market in causing the financial crisis, which has plunged the UK economy into the deepest recession in several decades.

The mortgage market review includes suggestions for the future regulation of mortgage lending, including the introduction of a new affordability review for borrowers. It also focuses on the responsibility of lenders for ensuring their customers are not financially over stretched.

Among the most striking features of the review is the proposed ban on self-certification mortgages.

Self-certification mortgages

Self-certification (‘self cert’) mortgages were originally designed for borrowers who could not accurately prove their true level of earnings.

Contract or freelance workers, self-employed people and homebuyers with several different sources of income were able to get self-cert home loans even if they lacked the documentation necessary to obtain approval for standard mortgages.

However, the availability of self-certification mortgages declined sharply when the credit crunch began. Lenders became more risk averse and were increasingly reluctant to offer ‘higher risk’ mortgages such as self-certification and sub-prime deals.

Moneyfacts, the financial data firm, says that 23% of the market’s 3,803 prime mortgage products were available through self-certification in July 2007. However, today only one lender, Platform (a division of the Co-Operative Bank), is offering self-certification mortgages – and potential borrowers have to choose between just two self-cert home loans.

Restrictions on self-cert lending

Which? principal policy adviser Vera Cottrell said: ‘Self-cert lending was intended to serve a very small number of borrowers in exceptional circumstances. However, our view is that self-cert mortgages have in the past been inappropriately used to artificially inflate people’s incomes.’

Critics of self-certification mortgages have referred to them as ‘liar loans’. Since the credit crunch began, the default rate on self-cert mortgages has been higher than on standard deals.

While some borrowers are bound to be concerned about the FSA’s plans to restrict self-certification mortgages, Ms Cottrell commented: ‘The vast majority of people, including the self-employed, should be in a position to provide some form of proof of income. Therefore, very few consumers are likely to experience difficulties as a result of any ban on self-cert lending that may come into force.’

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