Blame lenders for the demise of self-cert, argues Bob Young, managing director of Capital Home Loans
The FSA’s much anticipated Mortgage Market Review Paper has now been published and the industry as a whole is again on a path of change as outlined by the regulator. Much of the pre-publication debate about the content of the paper focused on both the potential for the regulator to bring the entire buy-to-let sector under its auspices and what might become of self-certification loans.
Focusing on the latter, the expectation that self-cert products will in some way be outlawed has come true with the FSA suggesting that all mortgage products require a degree of income verification. This might be a case of attempting to close the stable door after the horse has bolted, something many lenders can also be accused of as they attempt to react to the problems they were responsible for. Truly when looking at the degree of intervention the FSA is recommending, the mortgage industry only has itself to blame.
At its best, self-cert allowed individuals with variable incomes an opportunity they wouldn’t otherwise have had to purchase a property. Unfortunately, for every successful case/rationale that comes to mind, we should remember that people who have variable incomes are potentially the first to hit a brick wall during a recession. For example, from my own personal experience I know the difficulties of coping the first time my annual bonus check didn’t materialise to pay off the credit card debt I had accumulated as usual during the year. In previous years I had been a prime self-cert candidate with a reasonable basic and a high performance-based bonus which is all well and good until the economy moves into recession and the bonus dries up.
At its very worse, self-cert provided a ‘Liars Charter’ and it is no wonder that the Sunday papers were calling self-cert products ‘liar loans’. Widespread abuse of the product has taken place simply because, in the fight for mortgage competition, this specialist product was adopted by high-street lenders who had no real idea what they were doing. Because of the pressure these lenders were under to achieve their mortgage sales targets, they operated a ‘don’t tell and we won’t ask’ policy when it came to self-cert. This effectively invited mortgage fraud, while at the same time these lenders also drove the price of self-cert products down to prime status levels, ignoring the basic concept of pricing for risk
At present no-one can be sure of the extent of the abuse that has taken place. Many lenders seemingly took leave of their senses and even those who had strong knowledge and experience of the market were targeted by the fraudsters. For example, unlike many others, CHL only allowed self-cert for the self-employed and looked for some income verification from a book-keeper/accountant. Even this was subject to fraud and it was amazing the number of cases that were re-broked when we asked for additional evidence such as an SA302. In hindsight, we are mightily pleased we did ask.
Some lenders are attempting to pull the wool over our eyes by suggesting that self-cert fraud only existed at small levels and that their lending systems were robust enough to weed out potential fraudulent acts. I understand that the FSA’s own investigations have put paid to this lie – the much-vaunted infallible lending systems were fallible, fraud was rife and lenders are now paying for it. As an aside, I am fed up with some lenders justifying self-cert by saying that currently employed borrowers are equally at risk in a recession because they may become redundant. That is obvious which is why we all built systems that take into account professions that are at risk, and we use this information in the lending decision.
So, where does this leave self-cert? Well the FSA have certainly attempted to put the final nail in its coffin and there will need to be major industry intervention in the responses to the consultation, plus a sizeable u-turn from the regulator, to see self-cert as we once knew it survive. There will be some who will rage against this decision, suggesting that lenders have now learnt from their mistakes and should therefore be allowed to continue in much the same vein but with greater checks. However, if the industry is left to its own devices, how long before a new generation makes the same mistakes again? At present the only alternative would be to do nothing and with that comes the simple fact of life that the same problems and issues will resurface. As one experienced industry insider recently remarked, the next people to make our mistakes are probably still at school.
If self-cert can be saved then it can only have a place in the market in the self-employed arena not self-cert as we have come to know it. Instead, the ‘new’ self-cert would still need to have some verification from a reputable accountant that has knowledge of the applicant’s business and is able to provide information for which they will be held responsible. The alternative is no check and the lender carries out an extensive reasonability check, i.e. a plumber earning £50,000 will be seen as reasonable and passed. The problems with this is that the next stage would undoubtedly bring a large number of mortgage applications from ‘plumbers’ all earning ‘reasonable incomes’ I also foresee a lot of ‘IT contractors’ earning ‘reasonable incomes’ of £80,000.
This state of affairs does not suit the regulator and this is why lenders are not being left to their own devices in terms of ‘self-cert’. Income verification across the board is the obvious decision of the FSA as it seeks to draw a line in the sand for the lending industry and aims to cut down the potential for even greater fraud levels in the future.