Lenders given mortgage warning

The City's top regulator yesterday warned mortgage companies that they are lending homebuyers too much money, raising fears of a rerun of the early 1990s repossession crisis.

Against a backdrop of national house price rises of 16%, the Financial Services Authority has found "worrying signs" that mortgage lenders - who between them are owed nearly £450bn - are adopting laxer lending policies than in recent years.

After scrutinising the loans granted by nine of the biggest mortgage lenders, Howard Davies, chairman of the FSA, urged lenders to be more cautious when making loans to home buyers.

While making it clear the market did not yet resemble the late 1980s and early 1990s, when thousands of people faced having their homes repossessed, Mr Davies was clearly concerned about mortgage market lending trends.

In a speech to the country's major lenders yesterday, he "strongly counselled prudence and called on lenders to review their lending practices".

At the annual Council of Mortgage Lenders lunch he also issued a warning to house buyers that they could no longer rely on house inflation to reduce their debts.

Mr Davies' comments carry extra weight if, as is expected, the FSA takes over the regulation of the mortgage market. He sounded the alarm bells after an FSA survey of the nine major lenders, who between them account for 54% of the mortgage market. The survey found they were giving loans to customers at increasing greater multiples of their salaries. At the same time, they were offering borrowers loans against a greater proportion of their new homes than in past.

This was causing the regulator increasing concern in an environment where house buyers also owe a record £83bn of money on an increasing amount of "non mort gage" debt, for instance on car loans.

Mr Davies urged mortgage lenders, who have all introduced more flexible products for borrowers, not to let "the hard learned lessons of the last recession to recede from corporate memories".

His comments come at time of heated debated in the City about the speed at which the Bank of England will raise interest rates this year. Rates could rise from the current 6% to just 7.5% - still well below the double figures inflicted on lenders at the height of the last housing boom. That could take mortgage rates to above 9% from today's standard variable rate of 7.9%, causing hardship to first time buyers and other homeowners who have taken on large mortgages.

However, commentators say that in real terms, with inflation just 2%, the impact of mortgage rates could be just as painful for some borrowers.

The housing market itself is also patchy, with hotspots such as London leaping 25- 30% despite the 16% average.

The FSA survey found that homebuyers are being offered loans worth 3.5 to 3.75 times their income, compared with 3 to 3.25 before the boom. It also found that one in eight loans are for more than 95% of the value of a house, which means lenders are suffering higher risk on their mortgage books which could take five years to recede.

Mr Davies called on lenders to make their products simpler and eradicate difficult conditions such as tie-ins and redemption penalties. "It is in all our interests to clear up in those areas and to ensure that borrowers know what they are getting into," he said.

Halifax, Abbey National and Nationwide, the big three lenders, all insist that their average maximum lending percentages have been static or falling over the last year. They admit they do "stretch" their lending criteria in special circumstances but say this only makes up a tiny proportion of their total lending.