Blog 7: Financial Services Authority (FSA) plans to ban fast-track loans

2007’s financial crisis has badly affected global economy especially the western countries. The main root cause of the crisis was US’ CDO (Collateralized debt obligation). At the beginning, it was not easy to borrow money from a US bank because a borrower should have a relatively good credit score and a suitable and stable income. The bank lent money to those ‘good’ borrowers and repackaged these loans into CDOs (also a type of Mortgage-Backed Securities (MBS)) and sold them to Fannie Mae and Freddie Mac (mortgage lenders). These two corporations sold these securities to investment banks or individual investors or even other countries. When the borrowers repaid interests to the banks, investors could be distributed interests until the capitals were back. At a time, MBS has stable interests and were better than other financial products (government securities, share stock…), so it was famous among investors. Later the demands for MBS were increased, and the commercial banks lower the borrowers’ credit level (they won’t have much affected as they sell these MBS to mortgage lenders). This were a destroy actions. Housing prices were increased, many people can buy houses. However later these credit B or C borrowers didn’t have money to repay to the banks, and banks couldn’t sell the mortgages – houses in better prices, so the credit crunch came. The credit crunch has caused many difficult to many countries and this affection even has persisted to today.

Recently, FSA has made a proposals including require the banks check borrowers’ income before they offer loans to them. The proposals also suggest banning fast-track loans which need fewer documents of the borrowers. I think it is just because FSA is afraid of banks doing subprime mortgages again so made the proposals to prevent things happen again. But many hold oppose opinions. Banks have already tightened up their criteria for fast –track loans and the fast-track loans only offer to those borrowers who met a certain conditions (such as high credit score, the value of mortgages should higher than loan’s) The council of Mortgage Lenders (CML) considered that banning fast-track loans can increase management costs for lenders, and these costs will ultimately be boren by consumers.

In my opinion, it is good to see that FSE has learnt lessons from the financial crisis and made steps to prevent banks going wrong again. However banks themselves have also learnt lessons from the crisis and now they can better manage the credit problems. Fast-track is an effective sector and can reduce costs and time of loan activities. Many banks just offer fast-track to high credit scores and familiar customers and the loans need to less than ￡500,000. Besides, the self-employed now can’t have self-certified mortgages. According to a mortgage broker, the self-employed need to have evidence to prove their income so that they can have loans.

In the future, we don’t know whether we will have another financial crisis (hope not!), but banks or companies can do risk management to reduce the crisis hit. And they should not overlook every transaction they made.