Shaming of brokers who encourage house buyers to take on 'unrepayable' mortgages

City watchdogs lifted the lid on brokers who have encouraged house buyers to take on huge loans they cannot afford.

The Financial Services Authority has launched what it called 'one of the biggest crackdowns in its history' after identifying systematic abuse involving loan applications.

The problems centre on self-certification mortgages where buyers are allowed to simply state their income, without the normal checks being carried out with their employers.

Many brokers have been pushing these loans on first-time buyers, low income families and those with a patchy credit history as a way to get on the housing ladder.

It appears many house buyers have been encouraged to misrepresent their finances to qualify for a bigger loan.

Seven brokers have been told they face enforcement action which could lead to a heavy fine, while ten more have been put on notice of similar action.

Four firms have been ordered to cease trading until they have put in place new sales systems.

Sixty-five brokers have been told to go back through thousands of mortgages they have sold over the last few years.

This is thought to be the tip of the iceberg because the FSA investigated only 345 firms, a fraction of the total number.

It said brokers are under a legal duty to treat customers fairly. This includes ensuring that they are sold home loans they can afford.

"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," said Stephen Bland, who leads the FSA's policing of brokers.

"These practices are completely inconsistent with treating customers fairly - hence the large number of enforcement referrals and other regulatory actions."

Four years ago self cert loans accounted for around one in 20 mortgages, but the figure has doubled.

Mick McAteer, a former money expert at Which? warned that the sale of huge home loans without proper checks "has all the elements of a classic reckless lending scandal".

He said the FSA has been slow to clamp down on a problem that has escalated in recent years.

A number of repossession cases linked to the sale of self-cert mortgages have emerged.

One London couple were encouraged to inflate their joint income of around £24,000 to an imaginary £43,500 in order to qualify for a mortgage of £200,000. They found it impossible to meet the repayments.

The FSA is also investigating whether the big banks and building societies have failed to carry out full checks on customers' finances.

Some have been sold mortgages that will run far beyond their retirement age and others have been sold interest-only products, with no clear plan to repay the capital.

The Council of Mortgage Lenders said the problems found by the FSA should serve as a 'wake-up call'.

But it argued the FSA was partly responsible because it had not made clear what brokers need to do.