* To launch consultation with industry until March 2012
* Lenders should check income declarations thoroughly -FSA
* Borrowers should not rely on rising house prices
* Borrowers should not assume low rates will "last forever"
* Council of Mortgage Lenders: rules "strike right balance"
By Sudip Kar-Gupta
LONDON, Dec 19 Britain is to propose
stricter rules for mortgage lending that aim to prevent a
recurrence of irresponsible practices -- such as "liar loans" --
that led to the global financial crisis.
The UK financial watchdog -- the Financial Services
Authority -- will discuss these proposals with banks and other
lenders in a consultation that follows on from initial plans the
FSA put forward in July to tighten up mortgage regulation.
The FSA's move also follows draft guidelines set
out in October by the Financial Stability Board (FSB) -- a
global regulatory task force for the world's 20 leading
economies -- to ensure customers do not take on loans they
The FSA said lenders should verify income declarations in
every mortgage application, and that mortgages and loans should
only be advanced where there is a reasonable expectation that
the customer can repay the loan without relying on a rise in the
value of their property.
The FSA said lenders must also scrutinise more thoroughly
whether or not a customer can afford the terms of a mortgage,
and that borrowers should not enter into contracts which they
can only afford on the assumption that current low interest
rates "last forever."
The global credit crisis highlighted how the mortgage
industry had been blighted by so-called "liar loans" -
self-certified mortgages whereby the borrower was able to obtain
a mortgage without giving any proof of income.
The crisis began in 2007 when lower-income home owners in
the United States began defaulting on mortgages. The impact
rippled through banks globally as these "subprime" loans had
been bundled together and sold off to other banks in Europe.
"While the excesses of the pre-crisis period have largely
disappeared from the current market, it is important to ensure
that better practice endures in future when memories of the
crisis recede and the dangers of poor practice return," said FSA
Chairman Adair Turner.
Turner said the FSA estimated that the new rules would only
have a "marginal effect" on the mortgage sector in current
market conditions . The government is keen to ensure
that any new rules do not cause a slowdown in the overall
The FSA estimated that the new rules would impact 2.5
percent of Britain's mortgage customers. These people would find
that they would either have to take on a smaller mortgage or
would be better off by avoiding a mortgage altogether, under the
proposed stricter lending criteria.
"Whilst there is much detail to be pored over, the FSA's
proposals seem to strike broadly the right balance," Britain's
Council of Mortgage Lenders said in a statement.
The credit crisis led to Britain having to part-nationalise
Royal Bank of Scotland and Lloyds, and
aggressive lending practices nearly caused the collapse in 2007
of Northern Rock, which had offered mortgages of up to 125
percent of their property value.
Britain's mortgage industry is dominated by the "Big Four"
banks of RBS, Lloyds, Barclays and HSBC
, as well as mutually-owned savings and loans firms
such as Nationwide Building Society.