Watchdog to set out mortgage reform

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The Financial Services Authority is expected to propose a ban on mortgages under which borrowers do not have to prove their income.

But it is expected to stop short of imposing caps on the loan-to-value ratios and income multiples that lenders can advance to homeowners after consulting the industry.

FSA chairman Lord Turner said in March that the rapid expansion of mortgage lending in the UK was a key factor in triggering the current financial crisis. He added that the high loan-to-value ratios and high loan-to-income ratios advanced to borrowers by lenders had played an important role in the problems.

The Prime Minister said the "much tougher rules" would protect voters.

"I'm determined to end the reckless banking practices that have left so many of you worried about your household budgets," he said in his latest webcast on the Downing Street website. "So to give you a better deal we are taking extensive action to reform the whole culture of the financial sector and to protect and empower you, the consumer."

He went on: "I believe lenders should have to carry out proper checks on incomes before agreeing home loans. And to protect homebuyers further, we need much tougher rules to make sure that high loan-to-value or high loan-to-income mortgages are offered only when the lender has done rigorous checks to ensure people can keep up repayments."

But the suggestion that the FSA may start to regulate mortgage products, as well as the sales process, provoked stiff opposition from the industry.

Robert Sinclair, director of the Association of Mortgage Intermediaries, said: "House prices in the UK are affected by demand and a lack of supply much more so than elsewhere and house price bubbles are not caused by lax lending.

"The regulatory structure needs to balance the need to protect consumers from unaffordable debt with their desire to buy a home of their own. We do not believe that the regulation of mortgage products will have the desired effect. In fact, it will restrict consumers unnecessarily."