Mortgage lenders told to prepare for worst

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by Kay Murchie

The Financial Services Authority (FSA), the financial watchdog, has warned mortgage lenders to prepare for the worst and are being urged to protect themselves and customers against the threat of a credit storm in the New Year.

The FSA estimates that over 1.4 million borrowers on fixed-rate, short-term mortgages are due to come off their favourable terms next year, which were fixed when the Bank of England’s main interest rate was lower.

Many of these borrowers are on relatively high loan-to-value ratios or income multiples and will find it difficult, if not impossible, to refinance their mortgage on favourable terms, which will leave them facing a significantly higher interest rate on their mortgage, which may prove too much for many of them to afford.

The warning to the Council of Mortgage Lenders annual conference by Clive Briault, FSA retail managing director, will trigger new concerns for the UK’s property market. Mr Briault said firms should be robustly testing their ability to survive if credit conditions decline further and to prepare their handling of arrears and repossessions.

Mr Briault added that there is a very real prospect that conditions will worsen further into 2008 in terms of both liquidity and credit risks. The speech by Mr Briault outlined the FSA’s tough position on the problems surrounding mortgage lenders, who have been hit by a funding crisis caused by worsening credit conditions in the money markets.

Access to cash could become more difficult, a problem which affected Northern Rock earlier this year. The FSA said lenders needed contingency plans to guard against the worst outcomes.

The FSA also told lenders that in spite of the liquidity and credit risks, it was important that lenders maintained their focus on treating customers fairly, including their treatment of customers in arrears.