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Over the course of the past couple of years or so, the home owner loan and mortgage markets have suffered one of the worst periods in the history of loans, with several lenders closing down to new business altogether and those remaining tightening their lending criteria and reducing loan to value levels drastically, whilst struggling to obtain the necessary funding from the wholesale money markets to use to be able to offer loans to their customers.

Less than five years ago, it was relatively easy for anyone to obtain a home owner loan, or any other kind of secured loan, as property prices were growing and banks and building societies became extremely relaxed about offering loans to individuals, even at 100 per cent plus loan to values and for those individuals with a very poor credit rating.

Of course the credit crunch had the effect of putting a stop to all those easy home owner loans and mortgages overnight and we are all now paying the price for years of irresponsible lending from banks and building societies, as it has become extremely difficult for an individual to obtain the loan they require unless they have a perfect credit rating and only need a low loan to value ratio.

As the home owner loan market starts to slowly recover from the last two years, the financial regulator, the Financial Services Authority (FSA) is concerned that many lenders and loan brokers will return to their old ways and start throwing money at borrowers who are extremely unlikely to be able to ever repay the amount borrowed. As a result of this, the FSA has been conducting a survey into the various sectors of home owner loans, secured loans and mortgages, with a view to imposing additional regulation on the sector, on top of the current tight regulation which already exists.

The initial report from the FSA on the home owner loan market is due to be published at some time during October this year and there is a great deal of speculation amongst loan industry experts that it will bring with it some drastic changes to the entire market place for home owner loans. Whilst these new rules are designed to protect consumers and those looking for a new loan, thereby making the home owner loan market a safer place and less likely to experience the problems we have just recently seen for a second time, a large number of individuals within the home owner loan industry are concerned that any new regulation could actually have a detrimental effect on the market, slow down any signs of financial and economic recovery and actually make it harder for a potential borrower to be accepted for the loan they require.

The Financial Services Authority report and eventual additional regulation is likely to focus on those areas of the home owner loan market which have predominantly caused the majority of the problems for individual borrowers in the recent past. These are likely to include: high loan to value products, self certification loans, buy to let loans, impaired credit or bad credit loans and secured loans which take a second legal charge on a person’s home.

One major area of concern is that the FSA will place a ban on high loan to value products in the new regulation. Although high loan to value lending had become quite ridiculous prior to the credit crunch, with lenders offering loans of up to and beyond 100 per cent loan to value, for example Northern Rock’s Together range of products which offered a maximum loan to value of 125 per cent, these products have now completely disappeared and seem unlikely ever to return to the high street or even be available through specialist loan companies. The worry is that the FSA will impose a limit on loan to value across the whole secured loan market and this could be as low as 75 per cent loan to value, which would cripple the home owner loan market, especially for first time buyers, who often struggle to save even a 5 per cent deposit.

It is also expected that the FSA is likely to impose a complete ban on self certification loans which have proved to be extremely useful for certain individuals such as the self employed and those with complicated or irregular earnings, although it has to be said that these loan products have been subject to abuse in the past from borrowers increasing the amount they actually earn in order to obtain a loan, for example the part time cleaner in the local council offices who claimed to be a civil servant earning above £30,000 per annum!

The home owner loan industry itself has practically banned self certification loans already and whatever regulation is introduced to control it, the bad credit loan market is in a similar situation, as the majority of loan companies have had their fingers burned in the past and now no longer wish to be involved in this area of lending.

Secured loans, or second charge loans are not currently subject to any type of regulation and the FSA is hopefully planning to introduce regulation for this huge area of the loan market, as secured loans have actually caused more people to lose their homes through repossession than due to arrears on their main mortgage or home owner loan and most individuals would welcome some sensible regulation in this area.

Similarly buy to let loans are not currently regulated and whilst regulation in this sector could be beneficial for small time and inexperienced landlords who only dabble in the property market with one or two houses to rent out, it could make life a lot more difficult and complicated for many professional landlords with large property portfolios and buy to let loan facilities already established and in place.

The Council of mortgage Lenders (CML), the trade body representing home owner loan providers across the board, claim that many of the areas of concern for the FSA have already been addressed by lenders themselves, such as self certification loans, high loan to values and bad credit loans and that further regulation on top of what already exists could severely damage the home owner loan market going forward.

Michael Coogan of the CML commented on the FSA report, he said “The FSA faces a number of challenges and potential pitfalls in progressing its reviews too quickly. Perhaps the biggest of all is to resist external pressure to implement measures at a time when the mortgage market has self corrected many of the past problems, but is still not functioning effectively.

We must not forget that the existing mortgage rules have broadly been working well since they were introduced in 2004, enhancing protection while promoting competition and choice for consumers. The current problems stem not from a failure of the mortgage rule book, or from widespread credit problems in a recession, but essentially from past approaches to supervision of the rules and an oversupply of money to lend out. Now the pendulum has swung and the problem is the lack of available mortgage finance. Regulatory intervention on mortgages is unlikely to reverse this trend and may accentuate the problem. As it progresses its mortgage market review, the FSA should continue to have in mind the wider goal of promoting a vibrant and competitive mortgage market as we had before the credit crunch, encompassing different types of lender and catering for a wide range of customers.”