Britain Revamps Mortgage Lending Rules

Mortgage lenders in Britain will soon have to verify the incomes of all people taking out mortgages according to new regulations suggested this week.

I don't get it. Why would lenders need to be regulated in this way? Lenders have an enormous incentive to be repaid. Why does the government have to step in to force them to do due diligence?

Incentives must be screwed up in the system somewhere so that lenders are selling their loans and don't have adequate incentive to make sure these loans are repaid.

From the NYT: LONDON (Reuters) – The country's financial regulator plans to force mortgage lenders to check the income of all borrowers, scrapping so-called "liar loans" blamed for helping to fuel bad debt problems at the heart of the credit crunch.

In the first draft of plans to overhaul the mortgage market, the Financial Services Authority said on Monday it would impose affordability tests for all home loans, a move that would force consumers to detail spending before a loan is approved.

But it stopped short of capping loan to property price ratios that could have effectively banned mortgages like the 125 percent loan offered by Northern Rock before its near-collapse.

The initial findings of the review — which reflects the increasingly hands-on approach of a regulator widely criticised in the aftermath of the credit crunch — also called for the FSA's scope to extend to buy-to-let mortgages.