June is the time of the year when industry commentators look forward to hearing the Governor of the Bank of England give his ‘Mansion House’ speech. Historically, the speech has ‘pulled no punches’ when analysing the state of the market or outlining the steps that the Bank intend to take to control the market. There was particular interest in the speech this year for a number of reasons. Many commentators wanted to hear if the ‘Help to Buy scheme’ was deemed to be responsible for escalating house prices in the South East. Other observers wanted a ‘steer’ on the future direction of interest rates. But those in the mortgage industry wanted to learn if the Bank would take steps to control/restrict lending further. As MMR had been implemented for less than 3 months there was a concern that any further intervention would be premature and could cause a collapse in the housing market recovery. Those responsible for mortgage sales will, therefore, have been concerned to hear the Governor state that “There are some signs that underwriting standards are becoming more lax, with the proportion of new mortgages at high loan-to-income ratios now at an all-time high.” His view was based on the June 2014 “Mortgage Lenders and Administrators Statistics” release that showed that around 40% of new mortgages were at loan to income [LTIs] multipliers of at least 3.5, 25% at were at LTIs of at least 4 times and 10% were at LTIs of at least 4.5 times.
A detailed look at the June mortgage lenders’ data release show the Governor was right to raise the issue and warn the industry;
One has to ask how we have got to this position. A requirement on lenders to assess affordability is not new. The principle of responsible lending was, after all, first set out in the Office of Fair Trading’s Non-Status Lending Guidelines for Lenders and Brokers dated 18 July 1997. Those guidelines required underwriting decisions to be “subject to a proper assessment of the borrower’s ability to repay and taking full account of all relevant circumstances”. Since then we have seen self-regulation by the Mortgage Code Compliance Board and The Mortgage Code which mandated “All lending will be subject to our assessment of your ability to repay” and FSA/FCA MCOB rules which required, “a firm must assess whether the customer will be able to pay the sums due”.
In view of the historic and long standing regulatory requirements the Governor’s observation is worrying. A detailed look at the June mortgage lenders’ data release show the Governor was right to raise the issue and warn the industry; early days of MMR or not! The data shows that sole income applicant LTIs of 4.00 times or more were 8.9% of gross advances in q1 2011, but had increased to 11.6% in q1 2014. Loan to value percentages at the higher end also saw increases. In q1 2011 1.3% of gross advances were in the loan to value percentage range of 90% to 95%. This increased to 3.1% in q1 2014.
MMR is clear; lenders are fully responsible for assessing whether the customer can afford the loan, and they have to verify the customer’s income. All lenders have moved away from basic income multipliers as a means of assessing affordability and they all have implemented affordability models to comply with the MMR requirement. At a time when the Business Secretary, Vince Cable, suggests that a “stable level” of mortgage borrowing is up to 3.5 times income lenders need to ensure that their affordability models are fit for purpose. However, we will have to wait until the next Bank of England lending data release to see these trends continue or if the break has been applied.