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Unit 3 - CeMAP 2 > Markets & Borrowers > Flashcards

Markets & Borrowers Flashcards

1
Q

2008 Credit Crisis Cause

A
  • Cheap interest rates made it easy for excessive lending by lenders, including to sub-prime borrowers
  • Lenders were lending up to 125% mortgages
  • Lenders offered exploding mortgages (start small or rolled up interest)
  • Interest rates increased and were high in 2007 slowing the housing market.
  • When economy weakened, individuals lost jobs and had to sell their home
  • Housing market was over saturated, devaluing home values which meant many were in negative equity
  • Securitisation complicated matters
  • Lenders stopped lending
  • When banks, governments and business couldn’t borrow, the economy ground to a halt
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2
Q

Securitisation

A
  • Lenders packaging loans as investments
  • As the debt was now an investment it circumvented the Basel Accords on Banks Capital Adequacy
  • This meant the ceiling on debt was removed
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3
Q

Credit Crisis impact on housing market

A
  • BOE dropped interest rates to stimulate the economy
  • House price growth has since been slow and uneven, particularly fast in London, everywhere else much slower
  • First time buyers found it hard to get on the ladder with house price rises
  • Gov introduced Help to Buy and making BTL less attractive
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4
Q

MMR

A

Introduced 26th April 2014

1) Distinction - Info only/Advice (verbal)
- Advised (verbal) is regulated
2) Affordability Rules
- Lenders are responsible for ascertaining affordability based on income after expenses.
3) No Self-Certification Mortgages
4) Interest Only Mortgages
- Lenders are responsible for confirming affordability inclusive of repayment vehicle and making sure one is in place
5) Mortgage Advisors must have CeMAP Qualification

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5
Q

MCD

A 
Introduced 21st March 2016
- Sets EU regulatory standards with changes now regulated 
Newly regulated offerings 
1) CBTL Mortgages - regulated under MCOB
2) Second Mortgages 
3) Bridging loans - Some are covered
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6
Q

What effects housing and Mortgage Market

A
  • Interest Rates
  • Inflation
  • Supply & Demand
  • Government Actions (H2B etc)
  • Non Property Funding
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7
Q

What are interest rates effected by

A
  • Level of Government Borrowing
  • Higher level of Individual Borrowing
  • Monetary Policy
  • Foreign Interest Rates
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8
Q

Property Inflation

A
  • Measured by Consumer Price Index (CPI)
  • Usually 1-3%
  • Property Inflation is higher
  • Inflation can be increased by lowering interest rates to increase spending
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9
Q

Supply & Demand Effects

A
  • When there are not enough houses on the market, prices increase.
  • Too many houses on the market, prices reduce.
  • Government stimulate this by introducing H2B etc
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10
Q

Mortgage Market

A
  • Low risk to lenders (secured on asset)
  • Provides cross sell opportunities
  • Interest is long term
  • Still packaged as securities to offset debt
  • Very competitive market
  • Loans are funded through interbank market
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11
Q

Mortgage Packagers

A
  • Provide mortgage tailoring and admin for lenders

- Charge 1-2% of the loan

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12
Q

Insurance Company Mortgages

A
  • Don’t do many

- Provide mortgage related Insurance

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13
Q

Specialist Lenders

A
  • Subsidiaries of large lenders
  • Loans funded through the Interbank Market
  • More risky for borrowers
  • Centralised with no branches
  • Only offer through intermediaries
  • Often Securitise loans
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14
Q

Challenger Banks

A

E.g. Tesco Bank

  • Small branch network
  • Some just focus online
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15
Q

Local Authority Mortgage Scheme (LAMS)

A
  • Focus on those struggling to borrow
    Schemes
  • 1st time buyer - up to 20% indemnity of property price
  • Borrower only needs 5% deposit
  • LTV is 75% so they get a better rate
  • Local auth set Max Loan & Property Value themselves
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16
Q

BTL Lenders

A

Specialist Lenders only offering BTL mortgages

- Mostly unregulated by the FCS except CBTL

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17
Q

Sub-Prime Borrowers

A
  • High risk Borrowers
  • Impaired Credit History
  • Difficulty proving income e.g. newly self employed
  • Usually receive standard interest rates
  • Usually experience higher costs & arrangement fees
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18
Q

Sale & Rent Back

A
  • Regulated by FCA
  • Owner sells property to a company and rents it back at market rent
  • Provider must offer min 5yr tenancy
  • Alternative to losing their home
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19
Q

3 P’s of Mortgage Applications

A

Person
- 18 Plus
- Sound Mind
- Must not be undischarged bankrupt
Property
- Valued accurately for Property value security
- Affordability checks - Borrower security
Purpose
- Is the purpose of the mortgage acceptable ie. residential home or commercial

20
Q

Personal Borrowers

A

Buying a home for residential use

21
Q

BTL Borrowers

A

Buying as an investment to let

  • Rates used to be commercial but changed to residential 20 years ago, so industry grew.
  • Lenders assess affordability on rental income
  • Must be 145% rent to mortgage payment
22
Q

PRA Supervisory Statement for BTL

A

Min standards for underwriting (V Strict) with new affordability & Stress Testing

  • Interest Cover Ration 125-145% of Mortgage Cost
  • Income Affordability Test
  • Interest Rate Stress Test - Over 5 Years & must use FCA Rate
23
Q

Small Business Mortgages Regulated under FCS MCOB

A
  • 40% as residential (commercial property not regulated)
  • Small turnover below £1m
  • Must not be LLP or LTD company
  • Re-mortgage or further Advance must be solely for small business use
  • Affordability assessed using business plan and 3 years of accounts
    E.G. Shop with a flat upstairs
24
Q

Sole Trader Borrower

A
  • Subject to small business criteria
  • Turnover less than £1M
  • Mortgage meeting regulated mortgage criteria
25
Q

Partnership Borrower

A
  • Partnership agreement should be in place to split profits in death or retirement
  • Partners borrow on a personal basis
  • Turnover less than £1M
26
Q

LLP Borrower

A
  • Separate legal entity
  • Partners act as agents for partnership
  • Partners are not personally liable for debt
  • LLP mortgages unregulated
  • Taxed as individuals for income & Class 2 & 4 NIC’s on profit
  • Mortgages can be provided
27
Q

LTD Company Borrower

A
  • Can be commercial or residential loan
  • Seperate legal entity with shareholders
  • Owners not liable for debt (risky for lenders)
  • Lenders assess the strength of the company
  • If small, directors may need to guarentee
  • Articles of association dictates who can borrow
  • Usually a high rate, short term loan
  • lenders assess 3 years of accounts
28
Q

Banks & Building Society commercial lending limits

A
  • Proprietary orgs like banks have no limitation on lending
  • Building Societies can’t hold more than 25% of it’s loans in commercial mortgages
  • 75% of their lending must be residential
29
Q

Special Purpose Vehicle (SPV)

A
  • For holding business property
  • Structured as a LTD company
    + Separate Legal Entity
    + Shareholders own & control but don’t own the property directly
  • Loans not regulated by FCA
  • Pay Corporation Tax - 19%
  • Shareholders pay income tax on dividends
  • Shareholders only liable for debt if director & guarantor.
30
Q

Commercial Borrowers

A
  • Buying commercial property
  • Not regulated by FCA
  • Lender Checks business plan and financial health of the individual
  • If renting lender will check the type of tenant and lease type to protect themselves & the rental contract.
31
Q

Clubs & Associations

A
  • Managed by a committee on behalf of their members
  • Rules of operation outlines whether they can borrow
  • Lenders look at potential income and how they will repay
32
Q

Personal Representatives

A

The Executor or Administrator of a deceased persons estate
- May need to lend when an estate is in administration
+ IHT
+ To rehome dependants

33
Q

Trustees

A

Legally responsible for assets in trust

- May need to borrow to buy property

34
Q

Powers of Attorney

A

Donor gives power
Donee takes power - Attorney
Deputy - Appointed by Court of Protection

35
Q

General Power of Attorney

A
  • Set up for a defined period or for a specific purpose
  • Only for financial decisions
  • Only works while donor has mental capacity
  • Can be revoked by the donor at any time
36
Q

Lasting Power or Attorney

A

Established when the donor has mental capacity

  • Donor creates instructions for when they lose mental capacity
  • LPA’s can cover Health or Property & Affairs or both
  • Becomes valid when registered at Office of Public Guardian in event of loss of mental capacity
  • Property & Affairs can take effect at any time
37
Q

LPA Set-up

A
  • At set-up it’s verified by a certificate provider
  • Donee must have known the Donor for 2 years or more
  • Donee can be a Dr
  • When set-up Donor can choose 5 people to be made aware
    + When it takes effect, they can object
  • If they don’t have 5 people they can have 2 certificate providers sign
38
Q

Revoking an LPA

A
  • Can be revoked
    + Anytime before loss of mental capacity (registration with OPG)
    + Death of Donor
    + Bankruptcy of Donor

Will be made invalid id Donee (Attorney) is made bankrupt

39
Q

EPA

A

Prior to 2007 - replaced by LPA - some still in effect

  • Registered when donor has mental capacity
  • Registered with OPG once mental capacity is lost
  • Must be signed by Donor, Attorney & Witness
  • Same responsibilities before and after registration with OPG
  • Need to inform 3 relatives at registration, they can object
  • Once registered with OPG it cannot be revoked
  • Unregistered EPA can be revoked anytime.
40
Q

Mortgage Trapped Customers

A
  • Those prevented from moving due to strict affordability criteria in new MMR
    + Self-Cert & Interest Only
  • Lenders can override affordability in the following situation
    + Good payment history
    + Not increasing loan size
41
Q

Vulnerable Customers

A
  • Poor Credit
  • Debt Consolidation
  • Bankrupt
  • Right to Buy
  • Less Educated
  • Major life event - death, divorce
  • Elderly

Should be given extra support to make informed decisions

42
Q

Ineligible Borrowers

A
  • Not of Sound Mind - unless via Attorney in LPA or EPA
  • Minors - under 18
  • Undischarged Bankrupt
43
Q

Minors

A 
Relevant Acts 
- Law of property act 1925 
    \+ Can't hold interest in land
- Minors Contract Act 1987 
   \+ Can't be bound by contract 
- Consumer Credit Act 1974
   \+ Can't enter into an agreement for borrowing
44
Q

Insolvency Defined as

A
  • Persons Liabilities Exceed their Assets
  • Person Can’t fulfil financial obligations within a reasonable time
  • Can’t borrow more than £500 in single or joint names

Enterprise Act 2002
- Undischarged used to be 3 years, now 12 months

45
Q

Debt Relief Order (DRO)

A
  • Available with Debt less than £20k with net assets less than £1k
  • Individuals must meet conditions or DRO for 12 months - Creditors cannot pursue during this time
  • Debts are usually written off after 12 months

Moratorium
- Legally authorised period of delay for payment of money due

Unit 3 - CeMAP 2 (4 decks)

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