Brokers Have Pushed Self-cert Mortgages

Homebuyers have been encouraged by unscrupulous brokers to lie about their salary and finances so that they can qualify for mortgages way above what they can really afford. Such practices, experts warn, could drag Britain down into a sub-prime crisis the like of which the US is experiencing and is having knock-on effects for finances all around the globe.

Some brokers have been encouraging first-time buyers to opt for ‘self-cert’ mortgages, as well as families with low incomes and people with poor credit histories, as a way to get into the housing market. Self-cert mortgage enable people to put their income down without having any checks by an employer as to how much it really is. There is mounting evidence that some brokers are encouraging people to put down higher figures than the truth to get a bigger mortgage. The practice, say critics, is common among brokers striving to reach sales targets and paid on commission.

One broker said: “If you go to a client that has a low income, if you can get them to go down the self-cert route, you can declare any income you like and it is easy to get the deal passed. That's what they use it for, they abuse it because they want to pass as many as they can.”

Former money expert at Which? and adviser on financial inclusion, Mick McAteer, said: “This has all the elements of a classic reckless lending scandal. All the ingredients are there. There is a feeding frenzy. We're seeing fierce competition because lenders and financial services companies are killing themselves to get market share. To cap it all, we have very weak regulation at a time when possibly millions of people are vulnerable to interest rate rises and may have been mis-sold mortgages.”

The Financial Services Authority (FSA) has been urged to take action against firms in the wrong. Only four years ago self-cert mortgages amounted to 5% of all mortgages; now it is more like 10%.

Sub-prime mortgages come with higher interest rates, and currently the highest known is 11.5% - double the Bank of England’s base rate. People over-reaching themselves and then paying high interest rates will only find themselves on the road to ruin. There has already been an increase in home repossessions of 30% in 2007.

The feeling is that house price inflation has actually been stoked by these type of mortgages, with people taking out loans they cannot really afford. House values in the country have continually been said to be overvalued and this could be one reason that prices continue to rise beyond affordability.

The FSA is said to be ‘very concerned’ about some deals. Some weeks ago it took action against five brokers who were not making the proper checks on customers’ finances. The FSA also notes that people with self-cert mortgages have higher arrears.

Northern Rock has been in crisis as it couldn’t afford to finance its own mortgages; it is one bank that has aggressively pursued mortgage deals of many types. Both Bank of England Governor Mervyn King and Chancellor Alistair Darling have urged institutions to lend more responsibly.

Tom Smith
29th September 2007

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