Crack down on self certification mortgages

Filed Under Finance

Self certification mortgages sound a great idea. Tell the mortgage company that you are earning more than you actually are and you have access to bigger mortgages, even though the monthly payments may be close, or even exceed monthly take home pay.

Much of the buy to let market is fuelled by self certification mortgages and apparently around half of all sub prime mortgages are self certified. Sub prime mortgages and remortgages attract high commissions and brokers often charge huge arrangement fees knowing that sub prime applicants often have very few options if they want to extend their borrowing.

I know of one broker that charges over £3000 arrangement fees for a sub prime remortgage, but as these fees can be added to the mortgage, the borrowers swallow this even though it adds to even higher monthly payments.

Because sub prime mortgages are so lucrative, it is in the brokers interest to win this business, almost at any costs. Self certification allows the broker to encourage the applicant with credit problems to borrow more so that they earn more lucrative commission. Apparently some brokers have even encouraged applicants to fill their forms in in pencil so that they can tweak the earnings to meet the income requirements of larger loans.

Confronted with evidence from the BBC, the FSA is going to crack down on lenders and brokers involved in this overselling or mortgages and remortgages. It has even banned some brokers and intermediaries.

The problem is that these practises in the UK sub prime market echo the troubles experienced in the sub prime sector in the USA and we all know what damage that is doing. If the UK is to prevent a similar sub prime crisis, the FSA is right to crack down on the bad practises adopted by some brokers.

The lenders must take responsibility too by being vigorous in checking that stated self certified earnings are accurate and truthful.

This article from the BBC explains more about the problems with sub prime self certified mortgages

This link points to the BBC Radio File on 4 programme that illustrates some of the problems caused by self certification mortgage mis-selling.