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Mortgage Market Review: unintended consequences?

Background to the Mortgage Market Review

Following the global financial crisis, one major agenda point for the Financial Conduct Authority (FCA) has been a full review of the mortgage market. The Mortgage Market Review (MMR) promises significant changes to various aspects of residential mortgage sales in the UK and will see the greatest shake up in the market in 10 years.

MMR proposes to overhaul the way the residential mortgage market will operate in the future and in particular, introduce strict affordability assessments which will become mandatory as part of the Mortgage Conduct of Business Rules (MCOB). Self certification of residential loans will be banned and prospective borrowers will also face stress tests to assess the effect of interest rate increases on their ability to pay.

How are Lenders reacting to the proposals?

Most lenders have now published their proposals to comply with the new rules which will apply to any new residential loans (and variation of existing loans) from 26 April 2014. Often complex income and expenditure questionnaires will become the norm.

Some unintended market consequences

As always, it is likely there will be unintended consequences and one of these may be a reversal in ‘gaming’ of buy to let loans.

‘Gaming’ is a market term for, well, lying about the intended use of the property with a view to obtaining more favourable finance terms. Traditionally, unscrupulous borrowers (no doubt on the recommendation of some brokers) have taken out residential loans only to let the properties out in breach of their terms. Residential loans have traditionally been cheaper than buy to let and often require lower deposits.

However, as MMR tightens up the residential market, some commentators believe that many borrowers who cannot comply with the affordability tests will indicate they propose to let the property on completion leading to an effective reversal of gaming. The buy to let market is largely unregulated and not subject to MMR so borrowers who cannot evidence sufficient income to satisfy MMR for example may see this as the only way to obtain a loan. This could become a significant issue for the industry.

The FCA has announced that it proposes to review the effect of MMR at the end of 2014 and one aspect of this is likely to be whether the expected new wave of ‘liar loans’ has come to fruition (some commentators are referring to this as ‘the new self-cert’).

Most current buy to let loan conditions do not actually prevent the borrower from living in the property; they merely allow them to let it out on defined terms. This is an area many lenders will now have to look at it far more detail to mitigate any impact.

There is no doubt that ‘gaming’ stores up trouble for the future and it will be interesting when the first wave of repossessions filters through to see whether de facto residential borrowers on buy to let loans will attract the sympathy of the Courts.

Looking further ahead, there is little doubt that claims management companies looking for the latest cash cow will soon be preparing a new wave of claims against lenders for failing to realise borrowers were gaming and thus failing to apply MMR rules.

TLT has significant experience dealing with large volumes of ‘illegal’ buy to let cases and MCOB claims. We act for a number of lenders and are always thinking ahead of the impact of regulatory changes.

We do look forward to hearing from our clients on these issues so please do get in touch should you wish to discuss this further.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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