24th April 2014
Put MMR into a search engine and you get around 54 million hits. Most of those are for the MMR vaccine which protects young children – controversially – against measles, mumps and rubella.
Only a tiny minority refer to the Mortgage Market Review, the latest attempt by the regulators to control home loans. Arriving at a broker or bank near you this Saturday morning, although virtually unheralded in consumer media, it could be even more controversial than the vaccine because this MMR could kill something that is even more important to many than infant health. It could destroy the comfort that a huge number gain from seemingly ever rising property prices. Alternatively, it could be a damp squib or have, as so many market interventions produce, unintended consequences. Investment journalist Tony Levene considers the consequences.
What is the Mortgage Market Review?
This started in the post crash days of 2009 when there were fears – unfounded – of huge repossession numbers. The idea was to increase affordability checks and ensure those with interest-only mortgages had a repayment vehicle. The final rules were published in October 2012 but the lending industry was still producing guidance as late as last week.
It centres on “protecting consumers from themselves” – or reducing irrational exuberance, pre-emptive action to address detriment before it occurs. It involves new affordability tests, with the responsibility firmly on lenders, while preventing abuses and poor practice. Mortgage applicants will be “stress-tested” to see how they would cope with higher interest rates.
Lenders will still be allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
There is an increased bureaucratic cost which, some believe will lead to the end of shorter term fixed rates, including a new focus on “advice”.
But the most recent industry guidance http://www.cml.org.uk/cml/
What will MMR do to property prices?
The development of MMR over the past five years has taken place against a background, first of mortgage famine, and then, with aid from Help to Buy, the greater availability of loans which many blame for the current property price boom. This, according to where you stand, is either great news or an appalling market mismatch.
According to Peter Spencer, chief economist of the EY Item Club, MMR will dampen the “simmering housing market” as “caution by lenders, tighter lending criteria and an increase in house building will cool prices, preventing an unsustainable boom.” EY forecasts prices will rise by 7.4% this year and 7.2% next year, easing back to 4.2% in 2016 as the mortgage guarantee scheme ends.
He also tells the FCA to use recently gained macro-prudential tools to ensure that the income multiples of borrowers do not become too stretched. He wants greater policing of income multiples in London, which remains the main constraint to purchases in the capital, hoping this will avert a housing bubble, in conjunction with new building to increase supply.
He adds: “If these controls are rigorously applied this will eventually constrain London prices, particularly in hotspots like Hackney, and head off problems when interest rates rise.”
Intermediaries expect loans to become more difficult. Peter Williams, executive director of the Intermediary Mortgage Lenders Association says: “The market is still in early stages of recovery, and there now seems to be a growing consensus new regulations will have at least an initial dampening effect. In the short term, we are facing a likely drop in mortgage approvals as new practices are set in stone and while any remaining gremlins in new IT systems and processes are ironed out.” IMLA suggests lenders are increasingly worried the new stress test requirements will lead to “significantly more people being refused a mortgage.”
Brokers believe many lenders have still to work out their underwriting criteria – some will wait to see what rivals do. Both lenders and brokers have an interest in more, rather than fewer, loans.
But the regulators admit “seeking to mitigate potential detriment through detailed conduct rules is likely to have significant and broad unforeseen consequences in significantly limiting legitimate borrowers access to the market.”
Controls on lenders
The March Financial Policy Committee said banks’ balance sheets will be stress-tested to measure see how they might cope with a “housing market shock”. It feared borrowers were stretching mortgage terms over a longer period to reduce monthly payments against a backdrop of already low interest rates.
However, some believe the FPC may have misunderstood why borrowers stretch mortgage terms. Those who want an interest only loan but do not qualify for one, will extend to reduce payments.
The proportion of new interest only mortgages has declined from around 30% to low single figures in any case so the problem is not so severe as it once was.
Effect of cash buyers
Williams’ example of Hackney is not Hounslow and London is not Liverpool. The extreme overheating is confined to the London area where new building is restrained and where, more importantly, the ability to control mortgage finance is less important. It is the realm of the cash buyer who is impervious to interest rates and home loan criteria. Across the country, cash buyers, largely representing landlords, have increased from 25% pre-crash to around 40% now – and that could rise as those coming up to retirement work out what to do with their newly liberated pension pots.
Market choker or damp squib?
Brokers and lenders want to push up the proportion of non-cash property purchases. Ray Boulger at brokers Charcol says: “I suspect the proportion of outright declines will not increase that much as a result of MMR. More likely, lenders will only offer a smaller mortgage, effectively this will be the same as a decline as it will mean the applicant can’t proceed unless they find a bigger deposit or ask for a longer term or to approach a different lender. MMR puts a straitjacket on lenders in some respects but in theory leaves them considerable flexible on how they interpret the new rules in others.”
It’s too early to tell how the MMR will affect the market. And it is too early to say how lenders, brokers and customers will work around it.