City watchdogs have exposed the bogus advisors who encouraged people wanting to buy a house to take out huge loans they could not afford. The Financial Services Authority (FSA) opened an investigation they called ‘one of the biggest crackdowns in history’ after discovering a systematic abuse involving loan applications.

The issues arose due to self certificating mortgages which allow home buyers to state their income without the normal checks being sought from their employer. Many mortgage brokers have been approaching first time buyers, families with a low income and those with a poor credit history with these loans as an incentive for them to get on the property ladder.

Many house buyers have been persuaded to falsify their financial positions so they are able to become eligible for a bigger loan. Several brokers have been told they face action which could lead to a hefty fine, whilst others have been given notice they may face similar action.

Four firms have been instructed to cease trading until they have a new sales system put in place, with more than sixty brokers asked to go back through thousands of mortgages they have sold over the last few years. In total the Financial Services Authority investigated just 345 firms, which is thought to be just a fraction of the real number of cases. They concluded that brokers are under a legal duty to treat consumers fairly, including ensuring they are sold home loans they are able to afford.

The lead for the FSA’s policing of brokers, Stephen Bland said, “We found some firms willing to offer mortgages they know to be unaffordable and to accept self-cert business even where they had concerns that the financial information provided by the customer was implausible. These practices are completely inconsistent with treating customers fairly, hence the large number of enforcement referrals and other regulatory actions.”

Self certification loans accounted for about one in 20 mortgages in 2004, but that figure doubled in the following four years. Former money expert at Which?, Mick McAteer, warned that selling huge home loans without the necessary checks had all the elements of a classic reckless lending scandal. He said the Financial Services Authority had been too slow to clamp down on an escalating problem.

The FSA though are investigating whether the big high street banks and building societies failed to carry out detailed checks on their customers finances. It emerged that some house buyers were sold mortgages that run way beyond their retirement age, whilst others were sold interest only products with no clear plan to repay their loans. 

The number of repossession cases involving the sale of self certificating mortgages has steadily grown. One couple in London were persuaded to exaggerate their joint income of around £24,000 to £43,500 so they were able to qualify for a £200,000 mortgage. As a result, they were unable to meet their repayments.

The Council of Mortgage Lenders have said the problems discovered by the FSA served as a wake up call for home owners and mortgage firms. However, they did also argue that part of the responsibility should be with the FSA as they hadn’t made it clear what was expected from mortgage brokers.