The UK's financial watchdog has launched an investigation into the risky end of the mortgage market. About time too, we say!
The mortgage market here in the UK is an incredibly large, complex and varied beast. For the record, there are 11.7 million domestic home loans, with total mortgage debt at £1,097 billion. In other words, the average mortgage is now almost £93,800, or roughly twice what it was ten years ago.
What's more, with over 8,500 different mortgages to choose from, it's hard for homeowners and homebuyers to find their ideal home loan. This is especially the case at the lower end of the market, in the 'impaired credit' or sub-prime sector, which provides high-interest mortgages and secured loans to people with low incomes or poor credit histories.
For many years, I've been expressing my concerns about shady practices this area, which I call 'the Wild West' of the mortgage world. Hence, I'm pleased that City watchdog the Financial Services Authority (FSA) has decided to clean up this Augean stable by commencing an investigation into sub-prime mortgages. Then again, the FSA took over the regulation of mortgages in October 2004, so it took 2.5 years before deciding to probe the impaired-credit sector.
Personally, I've seen lots of evidence that brokers and lenders in the risky end of the mortgage market aren't treating their customers fairly. For example, sky-high interest rates often go hand-in-hand with hefty upfront arrangement fees, plus blatantly unfair fines for payment problems and arrears. With any luck, the FSA's Mortgage Effectiveness Review will find out where the bodies are buried and punish the firms involved.
By the way, on the other side of the Atlantic, sub-prime lending is also headline news. Indeed, this sector is close to collapse in the US, following years of rampant and reckless lending. According to the latest count at mortgageimplode.com, 55 sub-prime mortgage lenders have gone bust since late 2006. What's more, this is having a knock-on effect, with home repossessions soaring and house prices falling in many parts of America. Ouch!
Although pundits claim that nothing like this could ever happen over here, I have my doubts about some of these mad mortgages. Thus, any improvement to consumer protection in the mortgage market is to be warmly welcomed -- especially at the fringes, where borrowers are most at risk.
The FSA aims to complete its investigation by the end of this year, so mortgages rules and regulations will not be tightened until 2008 at the earliest. Therefore, I'd urge all homeowners and homebuyers to get expert, unbiased advice from a no-fee broker before signing on the dotted line. Why not try The Fool's Mortgage Service, which searches the entire market on your behalf and was voted Best Mortgage Site of the Year at the 2006 Online Finance Awards?