Is MMR an unnecessary interference in the mortgage market?
The new Mortgage Market Review (MMR) rules which come into effect on 26 April could upset the current recovery in the housing market.
Anyone applying for a new mortgage after that date will face much tougher questions about their income and expenditure than before. Lenders are required to apply much more stringent lending criteria.
MMR rules will not apply just to first-time buyers but to existing borrowers wanting to buy a new home, or in some cases if they want to vary an existing mortgage.
Mortgage applications will take longer to process
The upshot of MMR is that mortgages will take longer to get, and many some buyers will find it harder to obtain finance. The self-employed and people who rely on overtime or commission for a substantial part of their income are likely to be hardest hit.
Many homebuyers are dependent upon obtaining a mortgage to buy a property. For the last year or so mortgage lending has been generally increasing as buyers are returning to the housing market. So anything which makes it harder for buyers to obtain mortgage finance is likely to depress the market.
'Stress-test' for mortgage applicants
Under the new MMR rules which are being imposed by the Financial Conduct Authority (FCA) lenders will be required to 'stress-test' mortgage applicants. They will have to satisfy themselves that a borrower will be able to continue to meet mortgage repayments if interest rates rise or if the borrower is made redundant or retires.
Lenders will not only have to verify borrowers' income but will also have to consider whether they will have sufficient income after making the mortgage repayments to meet all their other living expenses.
And mortgage lenders will no longer be able to assume that property prices will continue to rise when considering an application.
Is MMR just further 'nanny-state' interference?
The question is whether these new rules are really required or whether they are just a further manifestation of the 'nanny-state' syndrome.
There is no doubt that in the past many lenders indulged in irresponsible lending to people who could not really afford a mortgage. Loans of 100% or more of the value of the property were not uncommon.
And mortgage underwriting was often based on over-optimistic property valuations coupled with the assumption that house prices would continue to rise. It was assumed that borrowers would easily be able to sell at a profit, or if they got into difficulties the lender could foreclose on the mortgage and recover their loan.
But the financial crash of 2007 and the subsequent drop in the housing market caused problems for both borrowers and lenders. The number of repossession sales soared and lenders were often unable to recover all of their loans.
Although lenders had to drastically tighten up their lending policies on new lending the government was still determined to ensure that lenders would be bound by much tighter rules in future. As a result the Financial Services Authority (FSA) set about the Mortgage Market Review and drew up a list of proposed rules.
The FSA consulted with organisations representing both lenders and borrowers and as a result the proposed rules were modified. The final version (now under the aegis of the FCA as successor to the FSA) will now come into operation on 26 April.
Lenders must now adopt responsible lending policies
The new MMR rules are aimed at lenders, mortgage brokers and other intermediaries. The emphasis is now on lenders adopting responsible lending policies.
This is all well and good, but the worry is that prospective buyers will find it takes longer for applications to be processed. Many buyers are also likely to find it much harder to obtain a mortgage, or at least to borrow enough to buy the property they want.
The new rules are also likely to mean that all borrowers will have to provide independent evidence of their earnings and other income – self-certification will no longer be allowed.
Borrowers will have to undergo exhaustive financial investigations
Borrowers will also need to show that they can cover all other normal living expenses as well as paying the mortgage. Lenders will be required to obtain evidence of customers' expenditure.
This will include not only basic household expenses such as council tax, insurance, water gas and electricity, but also any existing committed expenditure such as credit card bills. Daily travel costs as well as clothing, cleaning and other normal day-to-day expenses will also be included.
What this adds up to is that anyone applying for a new mortgage, or even wanting to vary an existing mortgage, is likely to face an exhaustive interrogation on their finances.
Up to now mortgage brokers have usually been able to obtain customers' information so that the customer did not have to deal directly with the lender. But under the new rules applicants are likely to find that they will now be required to attend a lengthy interview with the actual lender as well.
MMR may cause a substantial slow-down in housing market
All this means is that mortgage applications are going to take longer to process, leaving sellers dangling until their buyers have received an offer.
No-one doubts that things needed to change after the financial crash. But lenders have already tightened up on their lending policies. The new rules smack of over-kill, and are likely to have a sever impact on the mortgage market, and therefore on the housing market generally.
For several years the government has put in place various initiatives to encourage growth in the housing market. So it would be a pity if the current growth in the housing market is now stifled by another government initiative.