FSA to ban self-cert mortgages

Under the rules, banks must obtain proof of all borrowers' income before the loan is approved, the Financial Services Authority said on Tuesday.

"We need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers" said Lesley Titcomb, the FSA director responsible for the mortgage market.

The draft rules follows initial proposals which were published in October.

The new regime would effectively ban self-certification mortgages, where no proof of income is required.

Self-cert mortgages, dubbed "liar loans" after they were widely abused, accounted for almost half of all new mortgages between 2007 and the first quarter of 2010, the FSA said.

The Council of Mortgage Lenders warned the measures would also outlaw "fast track" loans, where lenders scrutinise applications less closely in selected low-risk cases, making mortgages less widely available overall.

"There will always be a regulatory trade-off between protecting consumers from over-borrowing and increasing the barriers to home ownership" CML director general Micheal Coogan said.

"The risk is that the gain will not match the pain in the short term."

The new FSA rules do not include a ceiling on loan to property price ratios, seen by some as the best way of preventing reckless borrowing.