The FSA should limit risky mortgages before a new housing bubble forms

I am bemused by this story in the FT. The FSA has been running a review of the mortgage market (the MMR) for sometime now. The idea is to try and prevent boom and bust being quite as painful as it has been this time around by limiting risky lending.

So far, all ideas of putting in place caps on loan to value ratios, banning interest-only mortgages, enforcing a maximum multiple of salary on loans and so on appear to have been rejected in favour of having the banks make proper checks on borrowers’ incomes and on their spending patterns – these being the things that should show just what their ability to repay a loan is like.

It is all basic and reasonably sensible stuff – stuff you’d have thought a bank would be on top of anyway.

But, like all sensible stuff, it is also turning out to be controversial. This week the Financial Services Consumer Panel said that any changes should be delayed. Why? Because “there is a danger that lenders will reject mortgages that they view as not complying with the MMR and so further restrict consumers’ options during a period of general lending restraint… To avert this danger, implementation of new affordability rules should be delayed until the housing market had demonstrably recovered.’”

Hmmmm. So the rules should be delayed so that banks aren’t discouraged from lending money to people who they think might not be able to afford to repay their loans at a time when it is increasingly clear that house prices are about to take another nasty tumble? That doesn’t seem quite right.

Surely, if everyone agrees that change is necessary, the consumer panel would be doing consumers more of a favour if they were urging the MMR to be brought forward? That way, its members would know that, even if the credit environment were to suddenly ease, no consumers were being allowed to take on more debt than they can cope with at a time when they are likely to make capital losses.

They’d also know that they had acted before a new bubble had been built rather than afterwards. Which would make a pleasant change.