March 14 (Bloomberg) -- Tougher rules on mortgage lending will rein in the type of practices that led to the U.S. sub- prime crisis, Adair Turner, chairman of the Financial Services Authority, said today.
The review of the mortgage market, which will restrict interest-only and self-certified mortgages, will stop banks relying on rising property prices to balance the risk that a borrower might not repay their loan, Turner told lawmakers in London today.
The practice “was the absolute core of the U.S. sub-prime disaster,” Turner said.
The FSA has proposed plans to reform the U.K.’s 1.2 trillion-pound ($1.89 trillion) mortgage market, arguing some practices exacerbated the banking crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The watchdog is seeking views on the proposals for the seventh time since the review began in 2009. The full set of proposals will be implemented in 2013.
The regulations require lenders to assess the impact of rising interest rates in mortgage-approval calculations and ban interest-only mortgages in cases where the borrower would have to rely on rising house prices to repay the loan.
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