Mortgage arrears: follow up - Treasury Contents


Written evidence submitted by Genworth Financial

  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.  Promotion—or even compulsion—in 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 insurer—de 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 people—including the rental market and joint equity schemes with housing associations.

March 2010

Annex

HIGHER STANDARD IN MORTGAGE LENDING

1.  RESPONSIBLE 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 deposit—they 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.

2.  TRANSPARENCY IN UNDERWRITING

  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 made.

  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.

3.  RISK-RELATED CAPITAL LEVELS

  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 properly.





 
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