Why A Self Certification Mortgage?
Both Self-cert and Sub-prime are significant sectors and it is anticipated both will continue to perform strongly. Gross lending in this particular sector is predicted to reach 26 billion GBP by the end of 2006. However both Self-cert and Sub-prime are also under scrutiny by the Financial Services Authority. There are currently about 4 million self-employed workers in the UK up from 3.2 million in 2000, according to the Office for National Statistics and an increasing number of people who rely on bonuses, commission or second incomes in addition to their basic pay.
UK working patterns are changing and multiple income sources are increasingly common. Datamonitor estimate some 6 million people are in employment types suited for Self-cert and forecasts 4.7% growth per annum to 2009.
Customers can be divided into three categories which helps determine the circumstances when self certification may well be the right option. Self-employed applicants who may not be in possession of an adequate history of audited accounts and/or taking much of their income as dividends. Contractors who may be on their first contract with no history of renewal, or may be contracting in an industry/profession outside of their previous experience and employed applicants may rely on bonuses or commission; have investment income, including buy-to-let properties; and they may have other income sources, such as maintenance payments.
However, it is true to say that self-certification has had a turbulent and checkered history, with industry commentators questioning whether there was a genuine need for the product. The trough came in 2003, when the BBC's Money Programme aired on the 28th October 2003 made allegations of mis-selling of self-certification mortgages. The press had a field day with headlines such as "Birmingham suspends staff after BBC probe" from the Daily Telegraph, "Mortgage Code Compliance Board to launch self-cert inquiry","Regulator to investigate allegations of false salary claims" commented the Financial Adviser, while The Times proclaimed "Self-certification gets a bad name". Money Marketing further added "Banks drop employed self-cert".
The programmes primary claim was that borrowers, with the encouragement of brokers and lenders. were making exaggerated and inflated claims about their incomes in order to get their application approved and processed. It also alleged that lenders did not carry out sufficient underwriting checks to ensure that the appropriate lending decisions were being made.
The Financial Services Authority conducted an investigation into the market. One lender highlighted in the programme took disciplinary action against its mortgage consultants featured in the show and stopped selling self certification mortgages in its branch network. Several other lenders changed product offerings, while others left the market altogether.
The Financial Services Authority followed up its investigation in November 2005 with a mystery shopping exercise. Although it was generally satisfied with its findings and largely cleared the industry of any systematic wrong-doing, it still found that about 5 per cent of intermediaries visited were prepared to inflate the applicant's income. As a result, the Financial Services Authority continues to view self-certification as a high-risk product area, though this now has more to do with encouraging all parties involved to remain vigilant than any specific failings in the industry or the products it provides. This was backed up by the Council of Mortgage Lenders response to the Financial Services Authorities report: "Self-cert continues to provide a useful option for borrowers who do not fit conventional mortgage criteria".
The Self-Cert story, to date, should be seen as a cautionary tale to both brokers and lenders. If lenders and compliance regimes are consistent then the opportunity for fabrication of figures will disappear. Perennial concerns for brokers and self-certification lenders is how much information they should be requesting, appropriate questions must be asked and inconsistencies questioned. Returning to an intermediary for actual proof of income is clearly inappropriate and in cases where the lender becomes uncomfortable with the non-verified income, the case should be rejected.
Care should also be taken with Fast-track and beware of automatic cascading while also exercising a degree of selectiveness. However all this within an industry that seems at odds with itself and one of extremes. From the self cert and sub prime market to the majority of lenders somewhat Dickensian approach of still applying a 3.25 income multiple rather than an industry standard affordability model.
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