In an attempt to put behind the irrational lending for good, UK's Financial Services Authority is proposing to force lenders to require proof of affordability before they can lend to home owners.

This will mostly affect those borrowers with no regular, fixed or certifiable income.

In the boom time leading up to the start of credit crunch in August 2007, any borrower could borrow money to buy a house as long as they could 'promise' that they can afford the mortgage payments. This led some to borrow more than they could sustainably afford as many did't actually had regular jobs or reliable sources of income. They started to default, and either ended up losing their homes to lenders, or had to sell to specialist companies who could stop repossession of their homes.

Self Service No More

From next year the Financial Services Authority (FSA) is likely to ban the self-certified mortgages completely - the types which were most popular during the housing boom. For example, out of 10,000 mortgage products in 2007, almost 3,000 were aimed at people with poor credit history as lenders could charge them more. And almost half of all these products allowed self certification.

"That is a level of complexity we could well do without," FSA chief executive Hector Sants said today.

Under new regime, borrowers will have to produce proof that they can afford the mortgage payments before they can be considered for a loan for their family home. Self-employed people may have to produce tax returns as proof.

Industry Must Act Responsibly

FSA is not proposing to regulate how much some one can actually borrow. They will leave it to the lender to decide the level of risk they are prepared to take.

For example lender will decide the level of income multiple or loan-to-value ratios that they are happy to lend. FSA will not exert any pressure on lenders against lending 100% of the purchase price either as was earlier anticipated. However it will keep a close eye on the market to make sure that lenders do not start to behave irrationally yet again.

New rules will force lenders to:

• Be ultimately responsible for assessing consumers' affordability to pay.
• Lenders can not offer high loan-to-value loans to borrowers with a poor credit history.
• Lenders can not charge borrowers who have got behind on payments, but are keeping to an arrangement to repay these arrears.

Tough line from FSA was expected for some time and will clearly keep lenders from being irresponsible again.

What remains to be seen however is what FSA or other organisations will do to encourage lenders start lending to those with jobs, fixed incomes and good credit histories. Because at this moment they are forced to pay premium of up to 4-6 per cent above BoE base rate to be able to borrow to move into a new or bigger family home.