Wednesday, 21 October 2009

Extra Data From Us is Key To Financial Health

Just for fun, I've been wading through the FSA's discussion paper on reforming the mortgage market.

The FSA's aims are to ensure the mortgage market is sustainable for all participants, and works better for consumers - and taxpayers.

The credit crunch has shown that consumer lending and related securitisation programmes have become a high risk, low/no data process. That has to change.

So, the immediate challenge to the FSA's approach is the decision (thinly explained on page 67) to focus only on the 'mortgage market', rather than the role of mortgages in the 'credit market' or indeed the overall investment market of which the credit market is an integral part. Of course, the FSA's remit and resources don't even extend to unsecured credit, let alone the entire investment market. This silo mentality renders the investment markets a fool's paradise.

Secondly, lenders and their investors (including the Treasury) will only get better at risk management if all the data systems in the lending/investment process are up to the job of collecting and processing enough credit data. That includes using the data gleaned in the underwriting process to help inform the loan collections/enforcement process, then 'closing the loop' by feeding the lessons learned back into the underwriting and investment processes. It would be interesting to see how much work the FSA has done to understand and encourage the level of investment in systems used for underwriting, collections and investment decisions.

Thirdly, the FSA is right to avoid 'blunt' caps on loan-to-value and debt-to-income ratios. Adding a more detailed calculation of 'free disposable income' is a good way to introduce more data that might help lenders and investors predict the likelihood of default. But that will only work if borrowers are willing to contribute accurate data, rather than try to 'game' the system - which lenders/investors will end up tolerating. So far, the FSA seems to be generating consumer resistance to providing extra information to lenders (making it harder for lenders to ask) by not explaining that extra data is critical to lenders improving their credit risk management systems, which ultimately protects the entire financial system.

The discussion period ends on 30 January 2010.
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