Mis sold Self-Certification Mortgages
These types of mortgages, when first made available to borrowers, were very popular and worked well. In the mortgage industry they’re known as, “self-cert” loans. They were designed to assist consumers who were self employed and required them to certify their own income as they didn’t always have payslips or book-keeper/accountant information or other means of proving their earnings.
An early specialist lender in self certification mortgages was The Mortgage Business who later became part of the HBOS group.
They originally targeted the self employed offering high Loan to Value. They increased lending in the early 1990’s from £100m per year to £1b per month in 2007; they became a champion for mortgage advisers and packagers offering a full range of products.
Self certification of income became available to employed customers and it soon became clear that the facility was being abused. Profit hungry lenders became greedy in their drive for market domination and the self cert loan also became available to people with a poor credit history, and for buy to let mortgages. It must be remembered that it is an offense to give false information on a mortgage application form. However, it is also the responsibility of the lender to ensure the applicant can afford their mortgage repayments.
The BBC’s Money Programme started investigating these types of mortgages and the application process. After months of undercover work filming, the programme “Mortgage Madness” answered what was called “one of the great puzzles of the British housing boom”. This was how some borrowers were managing to meet the rising cost in house prices.
Specialist lenders had accommodated their lending policy to allow borrowers to get far bigger mortgages than they were would qualify for on a full status mortgage application. It was summed as “all a borrower has to do is to lie about how much they earn”.
When a survey was conducted in Ealing, London, 9 out of 10 brokers who were asked for mortgage advice recommended that lies should be told about applicant’s salary, increasing it from £30,000 to £50,000 on the mortgage application form. This increased the amount of loan size offered by up to 75% more. This took into account the income multiples applied in the ‘self cert’ criteria.
When the Mortgage Market Review was announced by the Financial Services Authority (FSA), self certification mortgages were the first to be targeted with a ban. Since 2007 there has been a rapid withdrawal from the market of funding available for this product.
Self certification should not be confused with Fast-track mortgages. These usually require no income verification and were normally below 75% LTV. The FSA found that during the peak of the market 2006-2007, approximately 45% of all mortgages were on a ‘no income verification’ bases. This caused great concern and drew attention to the reckless lending that had taken place.
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