The Council of Mortgage Lenders (CML) warned that new regulations for the market being proposed by the Financial Services Authority (FSA) would create “mortgage prisoners” and lead to lower transaction levels.
It added that years in which net mortgage lending was negative could also become the norm.
The FSA is proposing banning self-certification mortgages and introducing tough affordability and income verification checks that lenders would have to carry out under its Mortgage Market Review (MMR).
But Michael Coogan, director general of the CML, warned that the proposals would limit the amount of lending banks and building societies did, leading to lower levels of house sales, which would in turn lead to price falls.
Speaking at a CML conference, he said: “On each modelling approach the FSA has used, it expects the MMR to cause house price falls.”
Mr Coogan said the mortgage market had already effectively shrunk to just six lenders as a result of the credit crunch.
But he warned that lenders’ response to the new rules was likely to be to lend even less or to keep their lending at current levels, stifling the recovery in the market.
Total mortgage advances are currently running at less than £150 billion a year, well down on gross lending of £367 billion in 2007.
Mr Coogan said it would be possible to have a sustainable market of responsible lending and borrowing in which £250 billion was advanced each year.
But he said: “The risk of negative net lending is real as we enter 2011 because of funding issues, if the unspoken aim (of the FSA) is to shrink mortgage debt, then this could become the norm.”
He also warned that the new rules were likely to create “mortgage prisoners” who were unable to move under the new criteria.
He added that first-time buyers were likely to have to continue finding large deposits, while they would also pay a higher price for mortgages because of their risk status.
He said this was likely to increase the age of people who bought their first home without parental help to their late 30s or even older.
Lenders were also likely to be less willing to advance money to “complex prime” customers, such as those whose income came from multiple sources, due to the extra administration and potential risk involved.
Mr Coogan warned that the biggest group of people who were likely to be affected by the new rules were those with interest-only mortgages.
The FSA has not yet set out proposals on new rules for this group, but indications suggest it will want lenders to check annually that borrowers have a repayment vehicle in place to pay back their mortgage, while they should check the performance of this vehicle every five years.
Mr Coogan said: “Lenders will not embrace the extra administrative costs, nor the unmanageable regulatory risk surrounding performance of investments outside of the lenders’ control.
“Interest-only mortgages will disappear from the market in the future.”
He said the unintended consequences of the new mortgage regulations were that it was likely to “stifle innovation and opportunity” and he urged the FSA to urgently reassess its proposals.
He said: “We do not want to sleepwalk into a housing finance market which is sustainable, but meets almost nobody’s aspirations because it is so risk-averse.”
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