But while the FCA and many industry experts have warned against the company, it has so far escaped any legal or regulatory enforcement. But does this mean a return to self-cert mortgages? Or will the MCD place further barriers against this type of lending?
We spoke to Graeme Wingate, founder of selfcert.co.uk, to find out why he decided to set up the company and whether he expects further barriers to lending in a post-MCD landscape.
Wingate said that while he always knew there would be demand, the 4,000 applicants seen in the first few days was well above what he ever expected.
He added that the quality of applicants is very high, and is regularly seeing examples of people being turned down by mainstream lenders despite needing only 30% LTV. Discussing the typical borrower, Wingate said a common example involved people moving back from abroad that had been turned because they couldn't prove their earnings, despite having huge deposits. He added that “examples of legitimate borrowers being banned from mortgage products is significant”.
Despite the FCA issuing a warning against self-cert lending, Wingate says the regulator has not attempted to contact him, and argued that the warning was ‘ambiguous’.
The FCA statement reads:
"Previously, when consumers took out a self-certified mortgage they self-certified that the income stated in their mortgage application was true. Because of the harm caused to consumers in the past, this is no longer permitted in the UK and firms must check a customer can afford a mortgage, including verifying their income in every case. From 21 March 2016, all firms offering mortgages in the UK (including EEA firms) will have to comply with the Mortgage Credit Directive, which requires a thorough affordability assessment based on information that has been verified by the lender.”
Yet Wingate argues that he believes his clients can afford their repayments as well as mainstream borrowers, who in the current climate could find themselves unemployed at any time. He says that many of his applicants had been declined by mainstream lenders who “were blaming regulators, or using regulators as an excuse not to lend.”
Many have argued that the introduction of MCD will prohibit self-cert firms from lending. However Wingate said that the terms “creditworthiness” and “affordability” are too vague, and will not stop self-cert firms from setting up in EEA Member States.
He continued:
“When we use the term ‘self-cert’, it refers to an applicant's ability to self certify their income. It does not relate to any ability for them to self certify their "creditworthiness" and "affordability" to us. Our model fits within the guidelines set out by the MCD. If the MCD was meant to prohibit self-certs it would have used the exact same wording as the MMR (which is clear regarding self-cert). It doesn't for a reason. Whatever that reason is, it is not our business to speculate on.”
However Robert Sinclair, Chief Executive of AMI, argued that there are a range of methods any borrower can use to support their stated income, without resorting to self-cert.
Sinclair said:
“AMI considers that Inland Revenue Tax Year Overview documents and certifications from qualified accountants work well in supporting lending applications. We would not want to see a return to self-certification of income and certainly not to the 2007 levels where over half the loans completed had no verification of income undertaken.”
Yet Wingate strongly believes that self-cert mortgages do not have higher default rates than other mortgage products. Despite the widespread belief, he asks people critical of self-cert to “think back very carefully, and try to remember any data that they may have seen which showed the default rates between self-cert and non self-cert borrowers at the time of the crash in 2008. Our bet is that if they are honest with themselves they will admit that they have never actually seen any”.
He said that his firm have asked several times for the data and are continually told that there is no data available to show the breakdown between the two groups.
He added that many people get confused with ‘sub-prime’ and ‘self-cert’, but “there is a big difference”.
Speaking to Financial Reporter, a CML spokesperson said:
“Given that the FCA specifically amended the Mortgage Conduct of Business Rules to require affordability assessment and income verification in all cases, it’s reasonable to say that UK regulators do not favour the concept of self cert lending – indeed, the rules now specifically prohibit it. It’s also reasonable to say that neither the CML nor lenders generally would seek to reverse this position.
“As an industry, UK lenders understand the rationale for the regulatory requirement for income verification. Generally, lenders are more interested in working constructively with the regulator to ensure that those borrowers who might legitimately have used self-cert in the past for convenience (e.g. those with highly variable income, complex or multiple sources of income, and the self-employed) are legitimately able to gain access to mortgages within the FCA’s rules, than in trying to reinvent self-cert as a product (which in a UK context, for a UK-based lender, would simply not be compliant with the letter or the spirit of MCOB).”
Surprisingly, Wingate agreed with the CML’s statement. He admitted that many lenders or potential start-ups would not consider turning to self-cert as they prefer to take low-risk legal advice and are not keen to launch any products not approved by the FCA.
Discussing his own reasons for starting a self-cert business, Wingate discussed his past as a short-term lender, revealing that he moved away from the sector after the FCA introduced payday lending caps in January 2015 and needed somewhere to secure his assets.
He said that he regularly sees payday lenders moving to other EEA Member States to avoid the caps, and that he expects to see other financial products being offered from abroad, but not mortgages on a large scale.
Citing reasons, Wingate said that the barriers to entry into the mortgage market are quite high because of the money involved in lending and the slow and steady rate of returns.
He added:
“99% of the time it will probably be corporate funding that will be behind Mortgages. Corporate entities tend not to push boundaries when it comes to regulation. They are very risk adverse.
“The best chance for the return of self-cert to the UK market on a larger scale would be based on investors in the UK asking forensic questions about why they are banned. Where are the numbers? Where is the evidence? Unfortunately politicians have now boxed themselves into such a corner over self-certs that they would have to be very brave to bring them back.”
Wingate believes that any reintroduction of self-certs in the UK would be a ‘gradual changing of words in the MMR or similar future review’.
He said:
“They would insert words such as ‘creditworthiness’, ‘affordability’ and ‘reasonable checks’. If we were being a little mischievous, we would say it would borrow the wording from the MCD.”
The one area he believes could set up in the EEA and offer self-cert products is the peer-to-peer sector, due to the low risk to borrowers, low LTVs, and a “lower barrier to entry due to those funding the products being spread out across a larger pool of mini creditors rather than one big source”.
Wingate continued:
“Add low interest rates being given by banks in the UK and self-cert peer-to-peer becomes attractive to potential mini investors. We stayed out of that because holding other people's money is not what we wanted to get involved in. It starts to get complicated and we didn't have the experience to do that. Someone will one day though, it's just a matter of time.”
