Homebuyers may face limits on the size of their mortgages to prevent future house price booms, the Financial Services Authority has indicated.
Limiting LTVs
Lord Turner, the chairman of the FSA, told an FSA mortgage conference that final decisions had not yet been taken, but creating limits on loans-to-value (LTV) and loans-to-income (LTI) were being seriously considered.
"So should the FSA end up recommending limits to LTV or LTI - the headline issue on which the debate about the future of the mortgage market sometimes focuses?" Turner asked his audience.
He admitted: "I do not at present know and I make no apology for that lack of certainty."
The regulator says the question of imposing limits is complex, with arguments for and against. It "requires careful consideration and further empirical analysis", said Turner. A clearer steer on thinking will be made clear by the FSA in September, when it publishes a discussion paper on mortgage regulation. This is intended to provoke a public debate.
No rush
"We do not need to rush to decision," explained Turner. "We do not face today, nor are we likely to face anytime soon, the danger of irrationally exuberant behaviour by either borrowers or lenders. We have time to get it right. And getting it right is very important given the huge importance of the mortgage and housing markets, to individual households, to banks, building societies and other credits intermediaries, and to the macro economy."
The FSA is also likely to consider preventing self-certification of income by borrowers and how to regulate buy-to-let lending more tightly. It will probably also propose the regulation of consolidated loans secured on homes.
Resistance
Lenders are likely to resist moves to impose limits on borrowers' ability to raise mortgages. Neil Johnson, policy manager at the Building Societies Association, says: "What is important is that a mortgage is being loaned to someone that can meet the repayments. That is why things have gone wrong in the past.
"I am not sure an arbitrary limit is what is needed. It's about ensuring people can meet the repayments."
Johnson points out that a set loan-to-income limit might discriminate against a single person, whose earnings might enable them to afford a bigger loan than a person with a large family. "It is important that lenders do actually look at situations in front of them," he argues.
'Blame lies with FSA'
The Council of Mortgage Lenders - which represents the banks and other lenders, as well as building societies - is also doubtful about possible changes to regulations. It says that the problem is not with the Mortgage Conduct Of Business rules, but with the focus of FSA regulation.
In the past, the CML suggests, the FSA has been more concerned about 'treating customers fairly' than about the sustainability of banks' business models and the systemic risk to the economy of poor business practices.
Fundamental questions about the mortgage and property markets need to be asked, says the CML. "Has the Government been right to promote a home ownership culture, creating an asset-owning democracy in the UK, or did this simply lead to more marginal borrowers taking-out loans that inevitably they could not afford as soon as they faced a financial shock?," asked a CML speech delivered to the FSA conference by CML head of policy Jackie Bennett, but written by its director general Michael Coogan.
The speech also asked whether the FSA's role should include helping to reopen sources of finance to mortgage lenders to stimulate further lending.
'Brokers at fault'
Much of the blame for excessive lending in the past lay with malpractice by some intermediaries, believes the CML - though it accepts that commission payments to mortgage brokers by lenders encouraged this.
"Problems which have been encountered include customer churn, product and commission bias, facilitating fraud by misrepresenting borrowers' income and poor quality advice," said Coogan. "Some intermediaries have acted more like salesmen interested in maintaining their cash flow than advisers protecting their customers' interests."
In the view of the CML enhanced mortgage regulation should include stronger regulation of intermediaries and advisors, a review of remuneration in the mortgage sector and tougher requirements on capital and professional indemnity insurance for intermediaries.
Despite the CML accepting that lenders made mistakes, it has given the impression that it believes it is brokers that are mostly to blame for bad lending decisions. We must wait until September to learn whether the FSA can be persauded to share this view.