Secret new rules set to reduce house prices

You may not have heard of the Mortgage Market Review, but it could have a serious impact on the value of your home.

Since the onset of the credit crunch, the financial regulator, the FSA, has spent a lot of time looking at how it can prevent a similar financial crisis in the future.

It has suggested and implemented plenty of different ideas along the way in an attempt to get the lenders to take a more responsible attitude towards their lending.

And while many of the ideas seem fairly sensible, it has emerged that even the regulator thinks they will lead to house price falls.

The Mortgage Market Review

When you hear the letters MMR you probably think of a vaccine for children, but for mortgage professionals that acronym instead stands for the Mortgage Market Review.  The whole thing is still at a proposal stage, with responses to the regulator’s plans invited up until November, after which we will have a better idea of just how many of the current plans will be implemented.

And it’s because it’s all still at the talking stage that in all likelihood you won’t have heard of it, or at least much about it. However, it could have a big impact not only on the mortgage market itself, but on the value of your home.

Here’s a round-up of the main features of the Mortgage Market Review proposals:

• Lenders would be required to verify the income of all mortgage applicants, to prevent fraud and ensure borrowers do not overstate their income.
• Lenders will be required to implement affordability tests for all mortgage applications, making the lender responsible for assessing a borrower’s ability to pay.
• Lenders must provide extra protection for credit-impaired borrowers – however, to the FSA that means stricter affordability tests for these borrowers.
• Increased involvement of the FSA in the setting of arrears charges

All of that seems fairly sensible, right? Yet the lenders are in a bit of a stink over a few comments stuck at the back of the report in one of the annexes.

Reducing lending, reducing house prices

Stuck towards the back of the document, the FSA explains what the likely consequences of its plans are. First of all, we have this corker: “The direct impact of the responsible lending proposals will be to restrict mortgage lending transactions.”

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It’s then followed up in the next paragraph with this: “Reduced mortgage lending would also be expected to dampen growth in house prices. This could smooth housing bubbles and reduce their detrimental impacts in subsequent housing crashes, raising economic growth over the longer term. Conversely, reductions in house prices could reduce collateral values, potentially reducing borrowing to households and businesses, reducing consumption and investment and potentially reducing economic growth in the shorter term.”

You won’t be surprised to hear that it’s the second potential scenario that has the mortgage lenders upset.

A bad time for borrowers

The Council of Mortgage Lenders has been particularly scathing about this proposals, and their stated aims of promoting a sustainable and stable market for future borrowers.

Instead, the trade body argues that falling house prices undermines lenders’ security, while borrowers will end up trapped in their current properties as they will either be stuck in negative equity, or unable to find a new mortgage should they want to move.

What’s more, it suggests that there will be even less innovation within the market, with first-time buyers needing ever higher deposits and faced with higher interest rates, and lenders less willing to deal with ‘complex’ prime borrowers due to extra administration and risk.

It all adds up to a fairly grim image of the mortgage market. Indeed, in the words of the trade body’s director general, Michael Coogan: “The golden age of home-ownership is over, for the moment."

It’s already happening!

This would be bad enough if the mortgage market was currently in a decent position, but things have been looking ropey for a while already.

According to the latest figures from the Bank of England, the number of loans approved for house purchase in August fell to 47,372 from July’s figure of 48,346, and was also down on the six month average of 48,619.

Indeed, according to the Council of Mortgage Lenders’ own figures, gross mortgage lending in August was just £11.4bn, down 14% from £13.3bn in July, and the lowest August figure since 2000. Surely things can’t get much worse?

Getting more expensive

Except, that they probably will. Thanks to the new Basel rules which affect all deposit-taking lenders, and the amount of capital they are required to keep hold of, there is a pretty good chance that mortgage rates will have to increase – that’s certainly the argument the banks are making, as I explain in New rules will push up your mortgage rate!

With all that in mind, if I knew I was going to be buying a property in the short-term I’d be tempted to get on with it, rather than wait for the market to contract still further - while house prices might fall in the future, my own equity would likely fall too, and I'd find it tougher to actually get a mortgage!

Below are some of the more attractive rates in the market today, while I’d also advise speaking to a mortgage broker if you are at all unsure about your situation or feel you need some advice. Our team are available by phone, email or instant messenger over at our mortgage centre.

More: Brilliant buy-to-let mortgages at under 5% | Ditch Britain for somewhere better!

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.