The Mortgage Market Review (MMR) was set up by the Financial Services Authority following the 2008 financial crisis as a comprehensive review of the mortgage market. It culminated in a Policy Statement and final rules in October 2012, with the majority of the MMR reforms coming into effect in April 2014.
The core element, the responsible lending rules, made lenders fully responsible for assessing whether a customer could afford a loan and set out principles for assessing affordability. The aim was to prevent consumers from taking out mortgages that were beyond their financial means or where the risks were high that the loans would become unaffordable as a result of reasonable, foreseeable developments such as increases in interest rates.
The MMR did not precisely define what was meant by ‘affordable’ or how affordability should be measured. However, during the development of the new policy a method was needed to measure and judge mortgage affordability using the data available at the time.
The FCA's November 2015 occasional paper presents the research undertaken for the review into three potential mortgage affordability metrics and their use in the cost benefit analysis of the mortgage lending reforms. It offers a more detailed discussion of the methodologies than was possible in the consultation documents.
The FCA is hoping that the methodological insights offered in the paper will be valuable to other researchers working in the highly topical area of mortgage affordability.