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FSA propose to shut the stable door (but has the horse bolted?)

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Yesterday the Financial Services Authority (FSA) published their ‘mortgage market review‘, unveiling their proposed reforms for the mortgage market.  Like the current MP’s expenses debacle, they too are making retrospective judgements based on hindsight-enlightened standards which gloss over their responsibility to have done something pre-emptive to avoid the whole situation.

The FSA has obviously been told to take control of the situation – especially now that banks don’t have the fear of commercial ruin to inform their attitude to credit and risk.  The decision by the government to bail out banks has changed the playing field and has required the FSA to micro-manage the banks, increasing the level of state enforced restriction in the mortgage market.  This represents a fundamental shift away from free market economics towards government controlled industry.  

The proposals intend to widen the scope of the FSA and will result in them regulating areas of lending that were previously governed by the lender’s internal policies towards commercial responsibility and risk.

The reforms seem to be very sensible, had they been implemented about 5 years ago, but are a bit late now the horse has bolted. The concern is that they could now cause more harm than good by restricting the availability of re-mortgage finance to existing borrowers who were fair game in the high days but who will not now satisfy the the less ‘relaxed lending strategies’ imposed on the banks by the FSA.  This will result in many having to sell their property when they cannot re-mortgage (especially if interest rates have returned to more usual levels) putting more properties on the market at a time when there will be less buyers (because they can’t get a mortgage) and so we will see a reduction in house prices and the famed ‘double-dip’ scenario.

Quoted in a Citywire article yesterday Seema Shah, an economist at Capital Economics, a macroeconomic research group said there would be a clear impact on demand if the rules were bought in.

What went wrong:

A rapid explosion in products
High risk lending strategies
Relaxed credit strategies
An assumption that the good times would never end
An implication that the FSA did not have the tools to monitor the ‘conduct and risk’ of individual lenders

What the FSA propose:

Affordability tests for all mortgages
A ban on self certification mortgages
A ban products with a ‘toxic combination’ of characteristics (when you put it like that who can disagree?!)
Make mortgage advisors personally responsible to the FSA
Widen FSA scope to include Buy To Let
The FSA will proactively analyse risks at an individual firm level, making judgements about the prudential and conduct risks firms and consumers may face

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