The Financial Services Authority (FSA) has issued additional guidelines for building societies, to prevent excessive generosity to borrowers, when setting mortgage rates and offering mortgage deals. The guidelines seek to prevent first time buyers in particular saddling themselves with debt which, if interest rates rise, could result in repayment difficulties, further down the line.
The new guidelines also indicate that mortgage deals classified as sub-prime lending by building societies could possibly be upgraded to prime status, once loans have been performing for 5 years.
The changes come into effect on 1 April, and must be implemented by 30 September.
Citing the Building Societies Act as its authority, the FSA has said that building societies unable to show ‘appropriate risk managment and skills’ in mortgage lending would be ‘steered’ to tighten up their controls, or switch to simpler business models that were easier to monitor.
The guidelines may encourage building societies to restrict already-tight definitions of ‘affordability’, which analyse the financial situations of borrowers and make a decision on how much debt they can comfortably sustain, before offering them a mortgage deal. The guidelines may put downward pressure on the size of mortgage deals made available to customers, on a case by case basis.
Two years ago the FSA coined the term ’toxic lending’ to describe the provision of loans that were high in relation to the paying power of borrowers, and which contributed to financial hardship and mortgage payment defaults, during the subsequent recession.
[...] FSA tightens up on Building Society mortgage deals [...]