Britain is to propose stricter rules for mortgage lending that aim to prevent a recurrence of irresponsible practices -- such as liar loans -- that led to the global financial crisis.
The UK financial watchdog -- the Financial Services Authority -- will discuss these proposals with banks and other lenders in a consultation that follows on from initial plans the FSA put forward in July to tighten up mortgage regulation.
The FSA's move also follows draft guidelines set out in October by the Financial Stability Board (FSB) -- a global regulatory task force for the world's 20 leading economies -- to ensure customers do not take on loans they cannot afford.
The FSA said lenders should verify income declarations in every mortgage application, and that mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay the loan without relying on a rise in the value of their property.
The FSA said lenders must also scrutinise more thoroughly whether or not a customer can afford the terms of a mortgage, and that borrowers should not enter into contracts which they can only afford on the assumption that current low interest rates last forever.
The global credit crisis highlighted how the mortgage industry had been blighted by so-called liar loans - self-certified mortgages whereby the borrower was able to obtain a mortgage without giving any proof of income.
The crisis began in 2007 when lower-income home owners in the United States began defaulting on mortgages. The impact rippled through banks globally as these subprime loans had been bundled together and sold off to other banks in Europe.
While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return, said FSA Chairman Adair Turner.
Turner said the FSA estimated that the new rules would only have a marginal effect on the mortgage sector in current market conditions. The government is keen to ensure that any new rules do not cause a slowdown in the overall housing market.
The FSA estimated that the new rules would impact 2.5 percent of Britain's mortgage customers. These people would find that they would either have to take on a smaller mortgage or would be better off by avoiding a mortgage altogether, under the proposed stricter lending criteria.
Whilst there is much detail to be pored over, the FSA's proposals seem to strike broadly the right balance, Britain's Council of Mortgage Lenders said in a statement.
The credit crisis led to Britain having to part-nationalise Royal Bank of Scotland and Lloyds, and aggressive lending practices nearly caused the collapse in 2007 of Northern Rock, which had offered mortgages of up to 125 percent of their property value.
Britain's mortgage industry is dominated by the Big Four banks of RBS, Lloyds, Barclays and HSBC, as well as mutually-owned savings and loans firms such as Nationwide Building Society.
(Reporting by Sudip Kar-Gupta. Editing by Jane Merriman)