Markets & Borrowers Flashcards
2008 Credit Crisis Cause
- 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
Securitisation
- 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
Credit Crisis impact on housing market
- 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
MMR
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
MCD
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
What effects housing and Mortgage Market
- Interest Rates
- Inflation
- Supply & Demand
- Government Actions (H2B etc)
- Non Property Funding
What are interest rates effected by
- Level of Government Borrowing
- Higher level of Individual Borrowing
- Monetary Policy
- Foreign Interest Rates
Property Inflation
- Measured by Consumer Price Index (CPI)
- Usually 1-3%
- Property Inflation is higher
- Inflation can be increased by lowering interest rates to increase spending
Supply & Demand Effects
- 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
Mortgage Market
- 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
Mortgage Packagers
- Provide mortgage tailoring and admin for lenders
- Charge 1-2% of the loan
Insurance Company Mortgages
- Don’t do many
- Provide mortgage related Insurance
Specialist Lenders
- 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
Challenger Banks
E.g. Tesco Bank
- Small branch network
- Some just focus online
Local Authority Mortgage Scheme (LAMS)
- 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
BTL Lenders
Specialist Lenders only offering BTL mortgages
- Mostly unregulated by the FCS except CBTL
Sub-Prime Borrowers
- 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
Sale & Rent Back
- 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
3 P’s of Mortgage Applications
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
Personal Borrowers
Buying a home for residential use
BTL Borrowers
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
PRA Supervisory Statement for BTL
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
Small Business Mortgages Regulated under FCS MCOB
- 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
Sole Trader Borrower
- Subject to small business criteria
- Turnover less than £1M
- Mortgage meeting regulated mortgage criteria
Partnership Borrower
- Partnership agreement should be in place to split profits in death or retirement
- Partners borrow on a personal basis
- Turnover less than £1M
LLP Borrower
- 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
LTD Company Borrower
- 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
Banks & Building Society commercial lending limits
- 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
Special Purpose Vehicle (SPV)
- 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.
Commercial Borrowers
- 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.
Clubs & Associations
- 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
Personal Representatives
The Executor or Administrator of a deceased persons estate
- May need to lend when an estate is in administration
+ IHT
+ To rehome dependants
Trustees
Legally responsible for assets in trust
- May need to borrow to buy property
Powers of Attorney
Donor gives power
Donee takes power - Attorney
Deputy - Appointed by Court of Protection
General Power of Attorney
- 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
Lasting Power or Attorney
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
LPA Set-up
- 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
Revoking an LPA
- 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
EPA
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.
Mortgage Trapped Customers
- 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
Vulnerable Customers
- 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
Ineligible Borrowers
- Not of Sound Mind - unless via Attorney in LPA or EPA
- Minors - under 18
- Undischarged Bankrupt
Minors
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 borrowingInsolvency Defined as
- 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
Debt Relief Order (DRO)
- 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
