Written evidence submitted by Genworth
1. The FSA's Mortgage Market Review Discussion
Paper, published in October 2009, focuses heavily on compulsory
income verification and affordability checks that should be carried
out by lenders. While we agree that these are useful additional
measures that can help promote sustainable borrowing and lending,
they should not be seen as some kind of "silver bullet".
We believe that Mortgage Payment Protection Insurance (MPPI) has
an important role to play for many borrowers in maintaining their
ability to keep up payments in adverse circumstances caused by
sickness, disability or involuntary unemployment. The take-up
of such policies should be incentivised by the state.
2. Promotionor even compulsionin
relation to MPPI policies would also reduce the need to impose
crude LTV/LTI caps, which is another policy option outlined in
the FSA Mortgage Market Review Discussion Paper. Although we generally
do not insure loans above 90% LTV (see attached Higher Lending
Standard, which we believe should be included in the FSA Handbook),
we do not think a legislated cap is the right way forward: there
is never just one risk driver in this equation, and a high-Ioan-to-value
ratio can be perfectly acceptable if the borrower's income is
sufficiently high and sustainable. What matters more is ensuring
that such credit worthy borrowers are protected against the risk
of unforeseen events, such as unemployment, accident or sickness.
Protection policies can and should be used to cover such risks.
3. The FSA Discussion Paper asks whether
there are any additional policy levers that should be used to
curtail income inflation and related mortgage fraud. Our view
is that income inflation is most closely associated with self-certified
lending. If robust verification of earnings is confirmed, then
the opportunity for income inflation will be reduced considerably.
Furthermore, if a system of universal mortgage insurance was introduced
in the UK, insurance fraud could also be reduced through the oversight
provided by the insurerde facto a second pair of eyes.
4. We strongly oppose bans on product sales
or bans on the development of particular products as this is disproportionate
and would ultimately stifle innovation. Provided thorough credit
searches and affordability assessments are carried out and our
Higher Lending Standard (Annex) is respected, we firmly believe
that there are different housing solutions for different peopleincluding
the rental market and joint equity schemes with housing associations.
HIGHER STANDARD IN MORTGAGE LENDING
We support and advocate a return to prudent
and responsible lending, with LTV not exceeding 90%. Only in exceptional
cases would we support lending up to 95%.
HLTV loans entail an element of risk but are
here to stay as credit demand continues from borrowers with disposable
income. These borrowers tend to be young, educated and with good
prospects but no depositthey do not deserve to be marginalised.
Mortgage insurance (MI) can bridge the gap between the needs of
these consumers for credit and the concerns of lenders who need
to transfer HLTV-related risk, as MI providers have the incentive
and the expertise to assess the true nature and extent of that
underlying risk. HLTV mortgages are not the same as subprime mortgages.
Quality standards have been adopted in other
markets such as Canada, where there is a statutory requirement
for mortgage insurance on all loans exceeding the 80% LTV threshold.
This creates a balanced risk pool, eliminating the problem of
adverse selection and lowering costs. The transfer of default
risk and prudential quality standards also act as a stabiliser
to the overall financial system and economy in Canada.
Consistent and transparent standards are needed
for establishing the two primary factors which determine any residential
mortgage lending decision: the creditworthiness of the borrower
and the value of the collateral against which the loan is being
Sometimes the absence of credible and reliable
information leads to inappropriate lending decisions and allocation
of capital to risk. Clarity and consistency in establishing the
L and the V in LTV are essential for delivering transparency and
so restoring confidence in the market.
As a leading global provider of residential
mortgage insurance, we have significant experience in several
countries of the performance of high loan-to-value (HLTV) mortgage
loans in good times and bad. While it is generally true that mortgage
lending is one of the safest forms of lending, experience demonstrates
that over the full economic cycle HLTV lending represents a significantly
riskier portion of the mortgage lending market. It is therefore
critical that higher levels of capital are held to reflect the
increased risk, and that incentives exist to manage this risk