The UK’s financial regulator, the Financial Services Authority, has been stating for some time that it wants stringent restrictions placed on certain types of lending by the UK’s banks, and one of the mortgage loan types that has been targeted by the FSA is the self certification mortgage. With these mortgages, which are granted to those that are self employed, there are concerns because the income that the borrower earns is difficult to predict.
These mortgages are also sometimes referred to as ‘liar loans’ and this is because officials believe that because the income of the borrower is more difficult to determine the borrower is able to over-exaggerate earnings in order to boost the amount that they borrow. However, the concerns of the FSA include the higher risk of these borrowers over-burdening themselves and ending up with a mortgage loan that they cannot possibly afford to repay. This is why the regulator has been seeking a ban on these loans.
However, according to recent reports the banking industry is seeking to fight against a ban on these mortgages, with some bank officials claiming that it penalises self employed people and make it impossible for them to get a mortgage in order to buy a property. Whilst the FSA has received some praise for its overhaul of standard in the banking sector this is a proposal that has been met with mixed reactions and could have a profound negative impact on those that are self employed.
One industry report stated: “Respondents were concerned that the proposal would impact negatively on the self employed, trigger an increased use of fraudulent income documentation and increase lenders administrative costs. Some respondents also believed the market has already adjusted by withdrawing self-certified products and, therefore, regulation is no longer required.”
Tags: self cert mortgages, Whilst, income documentation, UK's financial regulator, mixed reactions, mortgages
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What the hell Rick? You killen'um with this Maybach music!
Luis,
By 'easy money' I mean the whole twenty year trend of financial liberalisation and much of the 'innovation'. In the personal space that would 125% LTV mortgages, self cert mortgages, 5x income lending. In the corporate sector it would mean developments such as PIK (payment in kind) loans.
Yes – I undertsand that the problem with these types of lending is ultimately credit quality – but assessing purely by credit quality isn't workable (CDOs rated AAA, etc). I simply no longer trust a free financial sector to avoid making these sort of mistakes.
As for freeing uop access to credit. I support some kinds of free up but not others. For example your example of a working class entrepreneur – yes I'd generally support them having access to finance. But I do think that excessive personal lending has generally been associated wth excessive consumption growth. And the only solution I can see is more direct intervention in the loan market.
This why I think it goes beyond simple credit quality – unrestricted easy money can easily led to a situation wherby consumption is far too big a share of GDP. I don't want to see low interest rates simply used to propel consumption growth or to finance asset bubbles. I want it used, for want of a better term, 'productively'.
I recognise that credit is vital to the economy, but I also recognise that simply lowering the cost of credit would lead to all sorts of problems.
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The new rallying motto of the US: “Government for the banks, by the banks, and for the banks.”
This is actually really common; we exist for the sole purpose of pumping money to banks, bankers, and businesses that work for and with banks, and shouldn't forget it. Banks make a bad bungle; well — just borrow $12 trillion and shift the burden of loss from homeowners (who should have been able to purchase their notes at fire-sale prices) to banks.
The logical conclusion of trickle down, I guess.
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May It Be was on the LOTR soundtrack, I think.