IT contractors aghast as FSA evicts self-cert mortgages IT contractors could be forced to live in HP's excess packaging if the government adopts Financial Services Authority proposals to scrap self-certification mortgages. Over a year after the property boom popped and the UK's financial sector had to be bailed out by the government, the financial regulator has proposed a raft of …
I don't know what the problem is here, I have always needed to provide bank statements, proof of salary etc for mortgages. If you don't have those, then can't the self assessment return or tax records prove your income? On the other hand, if you are incorporated, then can't the company records support you? Testing for affordability seems like a good idea anyway and not something to be sneering at (r.e. news articles today regarding beer budgets).
Its unfortunate, but even if you can prove that you've never been late or missed a mortgage payment, show that you have enough equity in stocks/bonds, plus a high (700+) credit score, you can still be denied a mortgage.
The issue is that yes, its easy for the mortgage option many 'self employed' IT workers and entrepreneurial types have relied on to put a roof over our heads is now a thing of the past.
In a weak economy, and you're off contract for 5 months or longer, you're now going to be ding'd. And the rates which used to compensate for those down months, well... they're a thing of the past.
Looks like its time to quit IT and get in to law and politics. No shortage of lawyers here in the states, and while they're seeing cut backs, its not as bad as the IT Sector... ;-)
-G
If you make mortgage lending responsible the price of houses will have to crash (£250,000 for a one bedroom flat in London is just stupid when most people are on £20,000 - £30,000). The government will not allow prices to crash, it will make too many people unhappy (mainly the rich). The government will push through changes which achieve absolutely nothing, this may well be one of them.
If you cap mortgages and encourage sensible borrowing house prices will have to fall, dramatically.
Were is this coming from? The regulator is suggesting that some pimply faced yuff working on commision only should not give you a thirty year loan just because you say you can afford it, and you are upset. Why?
If you are good enough then after five years, you wont need the loan, and if you aren't good enough, then you wont be able to repay it anyway. Either way, no harn done.
But if you are new to contracting, then WTF are you doing taking out a twenty or thirty year loan? If you can't manage your own credit, why should the tax payer manage it for you?
[And before people get too snotty, I contracted for six years, and in that time, only 10% of my gross income went on taxes]
The issue is that if you are newly self-employed you wont have 3 years of accounts and thus have sufficient proof to get a mortgage.
To be fair to the banks though I think they should expect at least 3 years of accounts before lending large sums of money to the individual. The workaround is just wait for 3 years.
Let's face it, the idea that someone working in IT has a secure job is a complete joke. So perhaps banks should indeed be very careful when lending close to 100% mortgages to anyone in this sector.
It seems to me that we are saying that the banks are to blame for the crisis (and they are) because they would lend to absolutely anyone (and they did). So now that we are trying to introduce rules to curb that stupidity we should not perhaps be surprised when there are a casualties such as someone with no proven track record deciding to go freelance.
Actually it seems to me that in the current climate lending money to someone to buy a house with anything approaching a 100% mortgage while having just started their own IT business would fall into the category of unsafe lending. Precisely the kind of thing we complained the banks did.
Obviously it's a problem for those honest self-employed people, but the fact is it was abused by unscrupulous borrowers and advisors on a massive scale, making the credit bubble bigger which is why we're suffering so much now.
Something needs to be done, any suggestions of an alternative solution?
This is throwing the baby with the bath water.
The current tailspin in the mortgage market is not because people have borrowed beyond their ability to repay. It is because in a repossession scenario the banks are unable to recover what the property was supposed to guarantee. It is not a repayment problem, it is a valuation problem. Banks need to be forced to loan only what they can realistically recover (the way it is in France for example).
This however will pierce the bubble and the politicos cannot afford it.
Self-cert loans were being made to people who weren't self-employed. Half of all mortgages at the peak of the housing boom where to these sorts of borrowers, and it was widely perceived as a problem, even then - especially when the main aim was to inflate the supposed borrower's earnings and boost the broker's commission.
There's no prohibition being proposed on loaning to the self-employed, only a requirement for proof of earnings to be made. This is how it has been done in Continental Europe for years. What is there, in your Tax returns and accounts, that you wouldn't want your lender seeing: worried they might think you're a crank, if they see how much you spend on tin foil hats, each year?
One thing's for sure: we cannot go on with the present bubble-bursting approach. House prices are going to take a long time to recover from this latest collapse, simply because of the sheer number of repossessions on the market, at the moment.
I'm self employed and have accounts going back 3 years and thus can prove my income.
Self certification is saying that you earn £xxxxxx without providing any proof. Anyone who is self employed will have accounts and these count as proof.
For those newly self employed without accounts, how is that any different from someone who has just started a job? An employed person can be sacked without any reason given for the first 12 months of a new job so a bank wouldn't take that job into account until you'd been there over a year and as a self employed person, you'd have a set of accounts after 12 months anyway.
Where's the problem other than people not being able to lie about their income and those fiddling their books getting screwed?
Another non-story.
Hyperbole strike at The Register. Again. Has Murdoch bought you out?
If you're newly 'self-employed' without 3 years of accounts, guess what? /I/ don't think you're entitled to a mortgage. Because in the current economic climate, I'm guessing not very many of these newly 'self-employed' will still be self-employed by the time any mortgage they get has its introductory period run out.
If you can prove that you're still likely to be solvent 3 years hence, then by all means prove it, but I certainly wouldn't go on 'your say so.'
No Documentation Self Cert Should be Banned out right!
Anyone worth thier salt has a proof of income, If nessacery an approved communication with the tax office should suffice. (based on a Nat Ins number prooving income via nat ins contribution)
It is not rocket Science! Talking of which Congrats To Daniel Jub on the Falcon Rocket Test (Not associated with the Falcon Baloon Test).
There is another aspect of this. There are companies out there - brokerages and packagers - who sell and administer mortgage offers for the banks. They profit no matter what happens to the client.
Brokerages take their cut from the lenders, and sometimes the client. Packagers take a cut from the lenders. Both of them profit for doing no more than someone salaried at the Halifax does from sitting behind a desk. While the person at Halifax is more restricted on what can be offered, the job is the same - find the best product of those available for the client.
When I worked for a brokerage - on the IT side I might add - I saw this work in a self-cert context. While some self-certs were from high street banks, many of them were not. Those not on the high street came from lenders who were in the market looking at the sub-prime side (read: greater risk). Sub-prime self-cert products offered the brokerages and packagers more money for each deal. All for a lot less paperwork.
There was no 3 + 1 income calculation. There was no credit check. Bankruptcy wasn't ever a problem. Sign on the dotted line and the loan is yours.
And, in time, some of the properties went into repossession. The banks lost because the houses could not be sold quickly, in addition to the cost of repossesion. The clients lost because they could no longer make their payments and now had nowhere to live. The brokerage and packagers, on the other hand, had profited already and were untouchable.
Personally, I don't think this ruling goes far enough.
(Posted anonomously as I am looking to be self-employed shortly and will need to deal with the proof of income stuff should I choose to change lenders. In three years. With fully audited accounts.)
How many people will this affect?
Contractors with less than 3 years accounts? so you *might* not be able to buy a new house, why is this a big deal? if you don't have any proven track record or guaranteed income why should you be lent hundreds of grand? seems sensible to me, OK so if you have two and a half years of accounts and the contractor market was such that you *know* you'll be able to make the repayments it will be really annoying, so don't sell your current house yet or rent for a bit, in fact selling and renting gets out of the whole "chain" issue then buying with nothing to sell is also quicker.
Sounds like the FSA are on the ball to me.
Earlier this year, I tried to remortgage.
With a good credit record, 3 years of accounts, a contract in hand (ie. decent forward order book), a building society and my own bank were happy to lend.
My bank mostly lends from customer deposits, so I wouldn't want them lending my money to someone who can't prove they can pay it back.
If you're thinking of going contracting, sort out your mortgage before you start, and if you don't have one, spend the 2-3 years you need to prove yourself saving a better deposit.
I saw this issue reported by the BBC in 2004. The Money Program dedication an entire program to the problem (and abuse) of the self-certification system. People could easily lie, claim they earned an average of £60K when they earned £20K, and get a lovely big house. Lots then defaulted when the interest rates changed (although are fine at the moment with a base rate of 0.5%!).
http://news.bbc.co.uk/1/hi/business/3478635.stm
Interesting article. Sounds like a good idea to sure up the system somewhat. What's so wrong with having to save up for a deposit for a few years? That's what we all had to do.
due to income tax, national insurance, council tax and VAT most of us are about 1/3 public sector workers anyway.....People are selfish (unless they are artificially 'rich' enough to be magnanimous), socialism doesn't work, news at 11.
Personally I'm not looking forward to Brown printing his way out of this hole with all the negative consequences that your average 2 bit african country enjoys....
/rant
Yes it is.
You might want to ask how the "repossession scenario" arises in the first place. That'll be people borrowing beyond their means to repay. Believe it or not, no bank wants to repossess property, it's very bad business and they always end up losing out (if only on the profit from the mortgage in question).
The fact that the Banks not only lent to people who couldn't repay, but were also prepared to lend so much as a percentage of the value that, in the event of a fall in the market, they weren't going to get back what they put in just takes the shine off an already rather dull turd.
I heard an interview with the head of the FSA this morning (Radio 4 - Today) at his explanation was entirely reasonable. At the peak of the mortgage boom, over 50% of all mortgages were self-cert. In his words (roughly) "It used to be taken for granted that banks would only make loans that were in both their and their clients interests - in the same way that we would never regulate against poking oneself in the eye with a stick. However, it's become clear we DO need to tell banks "Don't lend money to those who can't afford to pay it back".".
As mentioned above, it is not an end to mortgages for the self employed. Just self certifying your income. The Bank will be required to demand proof of income. In fairness, this has applied to the employed AND self employed in the past. My bank would not lend me a mortgage without a letter from my employer and still required me to have been in full-time employment for a certain period.
I can't imagine many scenarios where someone who would be adversely affected by this would be deserving of a loan and, therefore, it seems to make sense.
RE: Is it me being particularly thick?
No. It's limited reporting. Such rules are also in the proposal - they just haven't been reported with the same level of gusto because "Banks told to only lend as much as they can realistically expect to recover from the sale of the security" doesn't make a snappy, alarmist headline, does it?
Self-cert was a real problem, and arguably caused house prices to spiral out of control. Self-cert was what allowed people to borrow far more than they could have obtained from a conventional mortgage product, in order to pay higher and higher prices on houses, which were only going up in value because, apparently, everyone was loaded and chasing the same commodity.
This expectation that anyone should be able to walk into an estate agent's and walk out with a house, with no deposit and no questions asked, is the sort of bollocks that caused this mess in the first place.
No, you're absolutely right. If someone is only borrowing 20% of the value of their property then there should be no need for them to provide proof of their past income, and it would be stupid if the government were to force banks to refuse mortgages to those people. In any case, proof of past income is no guarantee of future income. The guarantee is in the house being mortgaged not in the old payslips.
In many cases you could probably lend 50% of the value fairly safely.
Is that in the same set of proposed changes, the FSA seem to think that delving deeper into a potential borrowers personal spending is needed, including how much you spend on alcohol.....
Yes a shakeup to the system is needed to reduce stupid lending, but there is a point that can be passed....
Actually this isn't true. No bank expects 100% of their loans to be returned which is one of the reasons the interest rate is not at the base rate. When calculating an interest rate for a mortgage, the banks have to consider the following:
1) The base rate.
2) The cost of any interest rate swap necessary to cover fixed rate terms.
3) The number of borrowers who might default, and the amount lost during repossession.
4) Profit Margins
In the US, the core of the crisis actually centred around making mistakes on number (3). Because the US market had never fallen before across the board, the banks assumed that they would be able to get significant percentages of the property back through repossession. So sub-prime mortgages were being issue with rates calculated on an expectation that 40% of borrowers would default and that the bank would lose 50% on each defaulter. The bottom 20% of the mortgages were therefore worthless.
The CDO system was then used to try and make the rest of the mortgages more worthwhile. All the mortgages were split into tranches where each tranche would take losses on the whole portfolio in turn. So if losses were limited to 20% then only the bottom tranche lost money. The top tranches were then insured by the monolines into AAA debt. When house prices started to fall, and more and more sub-prime mortgages started to default, they quickly found the assumptions were invalid, and debt that was supposed to be bomb-proof started losing money rapidly. This was then made worse by mark-to-market accounting standards. This meant that when one or two funds had to sell at rock-bottom prices because of margin calls, all the sub-prime portfolios had to be valued at a much lower value, despite the fact that they were almost certainly worth a lot more. This resulted in the massive write-downs, many of which will get at least partially reversed as the assets bounce back (which they will as house prices recover which they are already starting to do).
As long as the banks insist on enough deposit and insurance to cover losses and evicts and resell the property quickly on defaults.
Nothing wrong with banks self certifying their credit worthiness to the FSA, if they have enough insurance to cover their deposits, as long as the government lets them go bankrupt quickly if they get into trouble, and resell any assets left quickly.
The problem here, is that the government bailed out the banks, so there is no downside now to taking bad risks, because Gordon the Gopher will bail them out when they get into trouble.
get kicked in the teeth again and again and again. For the past decade or so polititians have rammed borrowing down our throats - "your property value has increased x amount under Labour, you love it, have some more equity release, go on more hoildays" etc etc. The same polititians cuddled up to the city swine - "yeah, do what you like, just keep it rolling in, we can keep taxes low and get voted in again" and everyone partied for ever and ever, until - "Oh crap!, what do you mean it's unsustainable ?", well we'd better get tough on the little peeps who keep borrowing too much, will they never learn! I think I'll be glad when the London Financial Centre folds completely and is bought by the Chinese and relocated accordingly. We can turn the empty craddles of greed into care centres for our ageing, peniless pensioners and ferel children. It's the ufcking banks who need restraint !, investing with our debts and trading in our hard-won mortgage borrwings, bastards the lot of them. Nuke the F(inacially) S(tupid) A(rses) and COMPLETELY seperate consumer banking activity from investment banking by statute, whilst demanding that at all times balance sheets for mortgage lending are in parity with the folding stuff in the vaults. I won't go on about bonuses, I've got graft to do, bills to pay and mouths to feed etc. etc. Oh! bring back the Victorian Lending Society and work ethic and public flogging for any banker who transgesses.
This is another toothless exercise to make it look like they are doing something when really they are trying to close the door after the horse has bolted, been run over by a truck and sent to the glue factory.
I have been self employed through a limited company for the past 10 years. During this time I have taken 2 mortgages and a re-mortgage . Every time I have had to provide proof of income through company accounts, personal bank statements and on one of the occasions a copy of the contract I had with a customer to prove the company had ongoing income.
Banks were the ones performing risky lending as they knew they would make more money from doing this than from customers with a bit of financial sense who don't incur charges by paying cards on time, not using overdrafts and staying in credit.
Up until the big crashes last year Credit limits on existing cards were regularly raised without request, plagued with junk mail for new credit cards with silly limits, personal loans and 100% + mortgages. Best thing about this "credit crunch" is I now get next to zilch junk mail.
Perhaps an independent organisation should analyse the banks lending patterns to customers who get into financial trouble as I am sure this would provide a wealth of evidence of the banks bad lending practices that could be used to set sensible lending rules.
Its a total joke that the government used tax payers money to bail out these organisations with a long record of reckless behaviour. Its just like giving money to a degenerate gambler.
Perhaps new IT contractors should be realistic in what they are asking for in the first place?
What I am hoping from this is that it will force house prices down to more realistic levels so people won't need to lie about their income just to put a roof over their heads - just like what they were before banks started offering self certified mortgages.
I really don't see how this proposal is a blow to IT contractors at all.
If you're new to the game then you don't have 3 years of accounts and you don't actually know if you'll be working for the next 3 years.
I wouldn't lend you several hundred grand, why should the banks (the fact that they would a few years ago is a problem that is being addressed).
If you've been contracting for a while, and proven that you can do it then you'll be able to get a mortgage. Simple.
It's worth pointing out that since a contractors income is relatively high, it would make far more sense IMO to save for that 3 years and go in with a large deposit.
I speak from the POV of a two year contractor, so I could well find that I can't have a mortgage for a year, but that's okay, I paid my first one off after my first 15 months as a contractor so it's all gravy now.
I'm a software contractor, and have been for 3 years now. 1 year ago we bought a house, and I have to say I never even heard of self-cert mortgages. I got a normal offset mortgage with Barclays, and that was that. I needed to give them a whole bunch of supporting bumf to show what I'd been earning for the previous 2 years, but that was all. Job done.
If anyone, anywhere, is stupid enough to loan money to people purely on the basis of them saying "yeah, honest guv, I can pay that back", they deserve to go bankrupt. And anyone stupid enough to bitch about not being able to get loans on that basis deserves repeated swift kicks up the arse until they stop whinging for no reason. Here, hold my coat, I'll boot their bots myself...
No.
"It is because in a repossession scenario the banks are unable to recover what the property was supposed to guarantee."
Indeed.
But when the multi-thousand bonus on the endowment (or even on the mortgage itself) is paid in full up front, who cares what happens in a repossession scenario maybe two or three years later? The employees bonuses aren't legally recoverable, and will have been spent.
Look fellers - a bank can lend quite happily on a self-cert basis if it 1) lends only a low proportion of the property's value so if you don't bay, it gets a nice fat house back (so those of you who say 'save for a deposit - duhhhhhhhhhhh - the situation doesn't apply) 2) it lends to those already flush with cash, ie lendning 40% to your 60% so *you* lose more than *them* if you can't make the payments. Okay? So why is *that* being banned? Why?
If we really want to ensure that no bank ever loses money on a mortgage deal again, the ban anything approaching a 100% mortgage. Demand 95% or better - but that isn't happening is it?
The big problem with the banks wasn't self-cert, it was lending to deadbeats, generally. And that wasn't even a major factor for UK banks, but for US banks that were meshed in with ours. The problem with UK banks now is that they figure they cna't fail, can't go bust, because the government will always bail them out!
I don't *want* anyone to lend money to people that can't afford to pay it back, but I want to motivation that stops htem doing that to come from simple market mechanisms - eg, don't go bust. Rather than yet more government interference in private contract.
What's next? Gordon says you're not allowed to lend your mate twenty quid on Friday night because he might not pay it back? In what way would that be any different? The State has no business in this. It's nothing to do with them.
AC,
The 'No Doc' is a self cert, just a different name in the states. They're also called 'low doc'.
We're not talking about a 100% loan or 95% loan. We're talking about a refi, or a loan where you're putting down more than 20%.
Heck, I've lived in my house for 10 years now. If I wanted to refi, where I have roughly 50% of the house paid off. (Depending on valuation) I still couldn't refi.
Trust me when I say that there are legitimate reasons why you would want a low doc / no doc loan. Oh and I should mention that you do pay a bit higher on the rates for those loans. The problem is that they are also the easiest to commit fraud. That's the real kicker. Mortgage fraud is part of the problem that is being addressed.
I remember it took my mortgage company 5 weeks and going back 8 years of accounts, over 6 jobs, contacting 5 different firms, for both permanent and contract jobs before they were satisfied I was acceptable! I had to write a full and frank account about why I had had so many jobs in 8 years. So many? I thought that was pretty steady for an IT contractor, 6 in 8 years!
I felt like simply printing in 48px font across the top of the forms, "I WORK IN I.T., GONKS! I.T.!"
in fact no mortgages for anyone. Watch the land prices plummet, but also ensure that only citizens can buy the land, and business rates are increased for organisations over 20 (arbitrary) people.
Also put a cap on the amount of land each person can own.
Solves the housing problem overnight. Remember everyone no one on this planet made the land, so all land is stolen and we are brokering in stolen goods.
Ahhhh guys... check the figures. The mortgage default rate in the UK is TINY...
"Today's figures show that there were 11,400 cases of possession (equivalent to one mortgage in 1,000) in the second quarter of 2009, 10% fewer than the 12,700 in the first quarter of the year but 14% more than the 10,000 cases of possession in the second quarter of last year."
http://www.cml.org.uk/cml/media/press/2357
So its not the rules on UK mortgages that were the problem - it was cowboy adventures on the US sub-prime market...
I'm self-employed and agree with others that this is a good thing.
Self-certification (or more accurately: "Lie to Buy") was being seriously abused. Just because you're self employed does not mean that you cannot prove your income (and official Tax records suffice, you do not need "audited" accounts).
People were lying about income because property prices have become so extortionately high that telling the truth about income would never get you a mortgage. If lenders required that borrowers had a good likelihood of being able to pay back their debts then property prices and lending would not have got so out of control.
What pisses me off is the FSA are STILL refusing to ban 100% and 125% mortgages (which was just as much to blame for the mess that many find themselves in).
Cough up at 25% of the house value and bank will lend you any amount you want, as any loan to you is insured to 75% of its value. They know you are serious getting your wodge out and accepting part of the risk and they are covered for the rest.
Outside of this it is up to them. Though halariously they often will not lend even when the monthly payments would be lower than you renting in an equivilent property and you as sure as hang going to find the cash to pay the rent so go figure.
13:58 vs 17:52, Peston vs Stalin, no less.
To all of those smugly saying 'if you don't have enough deposit, wait three years' - consider first time buyers, already appalled at the sheds they could barely afford, who watched a market that had been running away at 20% for the previous three years and showed no sign of slowing. If your unequivocal advice to them was to hold back, you could have consigned them to the suburbs before they even had a chance. With property being most people's biggest asset, that could have been a dreadful move.
Of course, it should be down to the bright young things to convince banks to lend to them against their better judgement, and not to have 125% handed over on a stick, but over-regulation is the Daily Fail response.
Advise away, armchair folk, with your nieces and nephews safely holed up in Slough.
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