Fast-track mortgages may win reprieve

Fast-track mortgages – which waive income checks for borrowers with high credit scores seeking low loan-to-value advances – look increasingly likely to remain available as the Financial Services Authority (FSA) reassesses its proposal that lenders must check borrowers’ income in all mortgage applications.

Last July, the FSA launched draft proposals as part of its review of the mortgage market, which included the requirement that banks check borrowers’ incomes before they offer mortgages and impose tougher affordability tests.

This has already seen lenders withdraw their self-certification mortgages – dubbed “liar loans” – which became popular during the housing market boom as they allowed borrowers simply to state their earnings without having to verify the figure.

The proposals also suggested banning fast-track loans, which require less documentation from applicants deemed low-risk. However, industry sources believe the regulator is likely to backtrack on banning these mortgages in its final set of rules, due to be published this autumn.

Lenders have been providing the regulator with further evidence that shows how fast-track loans are better performing and have a lower level of default than income-verified mortgages.

Banks have also tightened up their criteria for fast-track loans over the past year, which is likely to make the difference in performance between fast-track and normal loans even greater than it was before.

“I feel pretty optimistic that the FSA is going to backtrack on their decision,” said Ray Boulger of John Charcol, a mortgage broker. “The evidence in favour of allowing fast-track to continue, in my view, is pretty overwhelming.”

Lloyd Cochrane, managing director of retail products at Northern Rock, said it had shared its fast-track data with the FSA recently. “There are signs that they are reflecting a bit more on fast-track,” he noted.

Cochrane said 10 per cent of applicants go through the fast-track process, but it only offers this to its low-risk customers. Since the credit crisis, Northern Rock has tightened its criteria so only borrowers with mortgages lower than 70 per cent of the property’s value and a high credit score can be fast-tracked.

Halifax will allow up to 85 per cent loan-to-value for employed applicants if they meet the bank’s top credit score, but self-employed borrowers with the same credit score can only obtain 65 per cent loan-to-value. Nationwide Building Society excludes all self-
employed borrowers from its fast-track process.

Most banks will also only offer fast-track loans of less than £500,000.

“Lenders are using sensible methods to identify what are low-risk cases and therefore, which cases they can save some administration costs by doing less checking,” said Boulger.

Banks are also placing the onus on brokers by stating that confirmation of income can be requested at any time for cases that fast-track, according to Nigel Bedford of Largemortgageloans.com.

“There could be serious consequences for a broker abusing the facility,” he added.

The Council of Mortgage Lenders (CML) has warned that banning fast-track would increase costs for lenders, which will ultimately be borne by consumers. Sue Anderson of the CML said the evidence is clear that fast-track has proved to be a very effective and high-performing sector. “We very much hope that any proposed reforms will be based on the evidence,” she said.

A spokesman for the FSA would not comment specifically on fast-track loans but admitted that its consultation on responsible lending was “ongoing” and proposals were not final. The regulator will be publishing a full impact analysis of its proposals in the summer.

In a speech last week, Hector Sants, chief executive of the FSA, said no rule changes would occur before 2012. He said: “Our goal will be to reduce the possibility of consumer detriment in relation to affordability occurring without impacting the ability of the marketplace to offer affordable mortgages.”

While banks are still using the fast-track process, self-certified mortgages have disappeared from the mainstream market. “The self-employed now need to evidence their income,” said Melanie Bien of Private Finance, a mortgage broker.

Lenders will only take self-employed income into account if there is an earnings track record of two years or more that can be verified by accounts and tax returns.