With just over a month until the Mortgage Market Review comes into force, lenders are steeling themselves for one of the biggest market shake-ups in recent memory.
Germinated in the aftermath of the financial crisis, the MMR will implement strict affordability rules in the regulated mortgage sector that are intended to limit how much people can borrow. The intention is clear – on the one hand, the FCA wants to curtail disproportionate purchasing power in order to limit over-inflation of house prices, and on the other, it wants to stop borrowers from taking on more debt than they can realistically repay.
But is the regulator fighting a losing battle?
Polling 273 mortgage intermediaries in February, trade publication Mortgage Strategy found that more than half had received buy-to-let applications from clients who intended to live in the property. As the buy-to-let market is not subject to the same regulation as the residential market, borrowers do not face the same affordability requirements and interest rate stress-testing; this has prompted experts to warn that buy-to-let could become the new 'self-certification' mortgage.
This is not to say that fraudulent applications are guaranteed to succeed. But whatever measures the FCA takes, it seems that they cannot completely weed them out. The housing market is fiercely competitive, and as long as borrowers perceive that they must 'game the system' to get an edge, fraud will continue to be an inexorable part of it. On paper, the MMR may be for the good of individual borrowers and the market at large, but it is extremely difficult to convince struggling first-time buyers that making their mortgage application even trickier is somehow a good thing.
So what can be done? The FCA has announced its plans to begin its post-implementation review by the end of the year, and claims that its testing will be "substantive". The industry will be under a great deal of scrutiny in the months following the MMR in order to ensure that firms are complying with the new laws. But the FCA can only inspect so many firms, so many cases – they rely on reports of unregulated activity as much as their own observance and can only take their battle so far.
In an MMR discussion paper released in October 2009, the FCA (then the FSA) made their case for extending regulation to second-charge and buy-to-let lending. The debate has been resurrected many times since, and has always attracted vociferous opposition. Such a move would all but eliminate buy-to-let fraud, but the secondary effect could be far more damaging for the millions of households in the private rental sector.
A great deal of the buy-to-let sector is made up of 'small' landlords with a handful of properties, whose continued investment is vital to meet the demand for rental property. Their scope to do so, particularly in expensive areas, is all but dependent upon their exemption from the standard affordability requirements that apply to regulated customers. Were the same restrictions to be imposed upon buy-to-let borrowers, growth in the rental sector would become stunted and surging demand for rental property would go unmet. It seems unlikely that the short-term corrective effect on house prices, if any, would ease demand sufficiently. As such, any regulation of the buy to let mortgage market would need to go hand-in-hand with unprecedented construction; of social housing, as well as residential property for ownership and investment both.
And this, it seems, is the arrival point of any serious conjecture on the housing crisis: construction. It all boils down to demand, and the lack of construction to meet it. As long as desperation exists – the desperation for a home of one's own, no matter the cost, the means or the limited selection – so will fraud. And any attempt to stamp out mortgage fraud without taking care of the root cause – the desperation needed to commit it – is only ever going to be a temporary measure.