Interesting note this morning from Seema Shah at Capital Economics on the issue of self-certification mortgages.
Shah follows up on the theme that the FSA is planning to introduce a rule spelling the end of self-certification mortgages, or "liar loans" (She refers specifically to The Times' story on this from this week). These are mortgages where borrowers don't need to apply for proof of income. From the lending community's point of view, this measure seems a positive - these mortgages have been largely associated with unscrupulous borrowers who could pretend they earned more than they really do. Time for a crackdown.
Not so, according to Shah.
She quotes the FSA's own data that in the first half of this year, 14% of all mortgages approved were self certified, totalling 45,000 home loans. Shah says that the impact of ending these self-cert mortgages could be "significant", forming "yet another obstacle to a sustained housing market recovery."
She continues: "For a start, existing borrowers with self-certification mortgages who have experienced a drop in income, or who initially exaggerated their incomes, will struggle to refinance. At the margins, this may result in a rise in forced sales. However, the bigger impact will be on potential buyers.
"After all, even leaving aside those borrowers who deliberately lied in order to get a large enough loan, self-certification allows people with irregular earnings to obtain a loan based on their own assessment of their potential earnings. And that could potentially be based on a single year, or even a few months. By contrast, most conventional loans still require proof of income over longer time horizons, which in many cases would result in smaller mortgage offers.
"Unless the availability of mortgage credit improves sufficiently to allow borrowers to bridge the gap between house prices and earnings, the baton would have to pass to either high inflation, strong earnings growth or falls in nominal house prices. Given the weak economic outlook, we think deflation is a bigger risk than inflation, while average earnings growth is likely to fall into negative territory next year. That only leaves further house price falls. The upshot is that the closure of the self certification mortgage market would spell yet more bad news for house prices."
