FSA to target brokers over Self Certification

Article source: www.mortgageintroducer.com

FSA to target brokers over Self Certification

Mortgage brokers nationwide are beginning to express their concerns following the recent actions by the Financial Services Authority. This follows reports in the media concerning the continuing down turn in the mortgage market. Much of the recent property and mortgage market turmoil is being blamed on the mortgage brokers who offer self certification mortgages.
Self certification mortgages are offered to clients who are unable to provide proof of income. The clients for self certification mortgages can be both self employed and employed. The deals vary in size but typically have a higher lending charge when compared to traditional mortgages which are judged primarily on household income.

Self certification mortgages first came into being when Thatcher’s government, in the 80’s, decided to assist the public in getting onto the property ladder by selling off council properties at 50% of their market value. Banks welcomed the move from the Government and where more than prepared to offer mortgages, without the proof of income, thus self certification was born. Clients who apply for self certification are typically regarded as a higher risk, however, the banks saw and continue to see the higher lending charge, as well as the bigger deposit received on purchase (typically between 15% and 25%) as adequate justification for that; A higher lending charge typically sees higher profits and the deposit mitigates the risk they have incurred.

The Government can not take on any of the responsibility, as that would have a dire effect on their pole ratings. They can not blame the banks and building societies, as they have built a particularly good relationship with them. They can not blame the consumers who have purchased these mortgage products as that would be political suicide and this would not be very advisable for a government which is about to go through another general election. In a round about way, because the government can not blame the banks or the consumers, the FSA (The Financial Services Authority) is now attacking the middle men, the mortgage brokers and financial advisors, for the way in which they have conducted their business.

The problem, in real terms, lies in the manner in which a large majority of the self certification mortgages applications have been filled in. The self certification relies on the client providing an income declaration for the amount of income they earn or will earn. That together with their level of deposit decides what level of mortgage they can apply for.

Let’s use an example to highlight this more clearly. A married couple are applying for a self certification mortgage worth £250,000. For this specific example we will base it on an income multiple of 3.5 times. Now let us assume that they are putting down a 25% deposit of £62,500 on the property they are purchasing. This would leave them needing a mortgage of £187,000. On an income multiple of 3.5 they would need to be earning just over 53K as a couple. However this particular couple are only earning 40K. What do they do? In their quest to jump on the property ladder, do they risk all, lie and say that they have the required income or do they wait, save more money and purchase a property at a latter stage? Let us not forget that in a rising market the price of the property in question is more than likely to go up. This is the problem with self certification and the reason why clients, are as equally responsible as the broker and the banks, if not more, because the broker can only act on information provided by the client.