Britain proposes tougher home loans regulation

LONDON: Britain unveiled plans on Wednesday Nov 25,2009 for tougher regulation of the huge home loans market as fallout from the credit crunch highlights concerns about lax lending standards and fraud.

The government is proposing to expand the Financial Services Authority's remit to cover buy-to-let and second-charge mortgages or additional loans on a home that is already subject to a mortgage.

The FSA currently supervises primary mortgages, with additional loans regulated by the Office of Fair Trading.

There will also be tougher protection for borrowers whose lenders sell on mortgage books to third parties.

Loans worth up to 1.7 billion pounds ($2.81 billion) have been sold by troubled lenders needing to shore up finances in the downturn. Some loans have been snapped up at discounts by hedge funds and private equity groups, the government said.

Sarah McCarthy-Fry, a junior finance minister, said the global financial crisis has raised issues around the world about regulation of the mortgage market.

"We are determined to reform the system for the future, to offer both stronger protection for consumers and greater stability in the housing market," she said in a statement.

But the plans may never come to fruition, at least in the Labour government's preferred form, with an election due by June next year.

The opposition Conservative Party, which is tipped by opinion polls to win the election, has said it would abolish the FSA, casting doubt on the substance or timing of any mortgage reform.

FSA Chief Executive Hector Sants told reporters there is a welcome logic to the watchdog taking on responsibility for supervising second-charge mortgages as well.

The change would not affect the FSA's separate review of the mortgage market which is due to be completed later in 2010 and which has proposed banning self-certified or "liar" loans, Sants said.

FSA Chairman Adair Turner told parliament's treasury committee there were no plans to introduce curbs on mortgages such as loan-to-value or loan-to-income ratios.

"Whether a loan was self-certified was a much better predictor of getting into trouble," Turner said.

British consumer campaigner Which? welcomed steps that "give absolute clarity" to ensure that mortgages sold on are still subject to regulation that protects customers.

The credit crunch's origins were in the U.S. home loans market for people with a poor credit history.

It spilled over into the broader financial system, helping to trigger and prolong a global downturn that hit the United States, Britain and Spain particularly hard, partly due to the big housing booms those countries had experienced.

The government stepped in last year to delay repossessions as the recession deepened. Over 116,000 households benefit from lender forbearance on their home loans, the government said.

About 70 percent of British homes are privately owned and mortgage lending in 2008 totalled 253 billion pounds ($418.5 billion).

Annual buy-to-let lending rode a decade-long one-way bet in housing prices from its introduction in 1996 to a peak of nearly 45 billion pounds in 2007 before the credit crunch sent borrowing levels tumbling.

Mortgage fraud in the buy-to-let sector has also played a part in driving up arrears, with an FSA review highlighting the scope for collusion between developers, estate agents and valuers, the government said. "Problems in the buy-to-let mortgage market could threaten institutions the failure of which would present systemic risk," the government said.

Second charge mortgages are typically shorter-term and much smaller mortgages and often used by borrowers who want to consolidate other debts or whose poor credit history prevents them taking out unsecured loans.

"The crucial thing for us is how the measures are implemented," a Council of Mortgage Lenders spokesman said.

The government said it would consult on its proposals until 15 Feb. 2010 and that any final measures will be introduced through secondary legislation. - Reuters

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