The Financial Services Authority, the UK financial regulator, has carried out a recent review that has highlighted the lack of essential checks by some lenders and brokers in the sub-prime mortgage market. According to the FSA report many brokers and lenders are allowing sub-prime customers – those with a poor credit rating or no proof of income – to borrow money without carrying out adequate checks to ensure that the borrower can afford the repayments on the loan.
Homeowners in general are already suffering financially as a result of the five interest rate hikes that have taken place over the past year, with many struggling to keep up with repayments. For those in the sub-prime sector, where income could fluctuate or there could be many other debts to take into consideration, the situation could prove to be even worse, but with many lenders enabling this group to borrow without carrying out the necessary checks many may be taking on more than they can afford.
The FSA is now conducting a review of these services, and has highlighted the fact that around a third of brokers in this sector fail to carry out the necessary checks before arranging a loan for sub-prime customers. In addition, around half of brokers in the sector were allowing applicants to self certify their income. This is resulting in some people being allowed to take out loans that are stretching them financially, and in the event of yet another interest rate rise later this year – which is being widely predicted – there could be problems for these borrowers.
According to one MP: “Talking about a few rogue brokers is just skimming the surface of the problem. While rogue brokers are a problem, the more pressing issue is high street lenders aggressively trying to build market share. Lending income multiples for mortgages are now at an all-time high and, with interest rates set to rise further, the outlook for many homeowners looks grim.”
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