What the FSA was hoping, was that this could be achieved with as little side-effects as possible, especially given the state of the housing market in general at present.

The good news is that this morning the FSA have every right to have a smile on their faces after producing a thorough, though no doubt provocative, piece of work which achieves a great deal of its original aim. What is most pleasing, is that there is evidence that the FSA have held a genuine consultation period, taken much in, listened and ignored where both was necessary.

Of course there will be those that say these rules have either gone too far or not gone far enough, but on the whole it would be perhaps a little unfair for us to sit here and pontificate on the “could have should have” debate.

In essence, the whole underlying premise can be broken down into three key words; affordability, advice and realism.

At its’ core are 3 main principles for “good mortgage underwriting” :-

1. Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
2. This affordability assessment should allow for the possibility that interest rates might rise in future
3. Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.

Let’s face it, it is pretty hard to argue with any of those as a basic starting point. What is important however, is how they are interpreted and whether there are strict rules on each.

At first glance, and let’s be honest although I had an advanced copy I have not read all 438 pages, this is quite a balanced blend of prescriptive rules and general guidelines that leave some flexibility for both lenders and consumers.

The first key point is around income and affordability; and here it is prescriptive “Income will have to be verified in every mortgage application”.

This means an end to self-certification, which although this has disappeared anyway, the lid is being well and truly bolted shut to prevent a return. It also means potentially an end to fast-track lending, where whilst mortgage advisers needed to have evidence of income on their file ready to present to the lender at a moment’s notice, lenders only checked a sample.

Whether lenders will still find a way to do this now they are ultimately responsible remains to be seen, but I for one will not shed a tear for the end of fast-track in its entirety. All of this is sensible and will help to combat worrying levels of fraud.

Before you start to shout about the self-employed, for whom self-certification was initially designed for before it became so miss-used, again refreshingly the FSA have recognised this. There are no “prescriptive requirements for self-employed customers” and therefore lenders do retain a level of discretion over how they underwrite in this sector. As the report says, ” Our aim is to ensure that lenders take an informed lending risk based on the evidence – not disregard the risk altogether.”

Also, affordability will need to be calculated on a capital repayment basis, again something that many lenders do now anyway. Recognising that interest only is a “niche product”, which is suitable for some, gone are proposals to outlaw interest only mortgages altogether.

Instead “interest only mortgages can still be offered as long as borrowers have a credible plan to repay the capital, but relying on hopes of rising property values is not enough”.

So whilst lenders retain some discretion over how they calculate affordability, they must be robust and must also take into account possible future interest rate rises. In other words, if you can barely afford the mortgage at today’s historically low tracker rates, and / or on an interest only basis, well, you won’t qualify for a loan in the future.

This is of course entirely sensible and is something that any mortgage adviser worth their salt has been doing anyway for many years. Which leads on nicely to one of the other most important parts, advice.

The FSA have recognised that proper advice should be the cornerstone of any mortgage proposal and that there is a large degree of confusion from the general public over whether they are receiving advice or not. It has always seemed crazy that in this day and age, especially after the events of the last few years, a 1st Time Buyer with no experience can walk into a bank branch and obtain a 90% LTV mortgage with no advice!

Therefore the FSA propose to remove the non-advised sales process, “requiring all sales which involve spoken or other interactive dialogue with the consumer to be advised“.

This is a brave and necessary step taken by the FSA which not only levels the playing field between Mortgage Advisers and direct lenders, but will improve the prospects for all consumers taking out the largest loan they are likely to obtain in their life.

There are opt-outs for those to proceed on an execution only basis for professional or High-Net Worth consumers, although I have seen a good many mortgage advisers who need advice just as much as the next guy!

This means that a purely online basis where no conversation is had can proceed without any advice.

The FSA has also gone further in identifying vulnerable consumers, such as those consolidating debt, who will not be allowed to opt-out and must always take advice. This is stunningly simple common-sense and the FSA should be applauded for this.

In order to improve client understanding, there are simplifications to the Initial Disclosure Document, changes to Key Fact Illustration trigger points to avoid information overload and the requirement of “firms to give the consumer a plain and simple explanation of whether there are any limitations in the product range they provide.”

There has also been some recognition to those Mortgage Prisoners who can still prove they can afford the loan but need to move and may be in negative equity, for example. Lenders are given some discretion over these rules for existing customers with a good track record in order to keep the market somewhat liquid and allow for some much needed job transiency.

These “Transitional Arrangements” only come into play where there is no additional borrowing and the monthly payment will be the same or less than the existing payments.

Obviously the devil is always in the detail and I am sure there are other points of interest, especially where niche products such as Bridging loans are concerned, which will be highlighted in due course.

However, as the arguments begin until this consultation phase ends on March 30th 2012, it seems that whilst this may not be the ultimate panacea to please everyone, it is a sensible, practical and courageous offering which will do much to ensure the illness does not become an epidemic again, whilst it should also avoid critically harming the patient.

The discussion was of course the much publicised Mortgage Market Review, (MMR) which in many people’s eyes threatens to derail any hope of recovery in the housing market and has certainly at least got Mr Shapps all fired up and even the Prime Minister himself concerned about the economic effects of the proposed regulation.

In theory, it is hard to argue with the FSA that they do mean well and want to try to ensure that we do not have a repeat performance of the past few years, but this does seem to be a classic example of locking the stable doors after the horse has bolted.

In actual fact, there is a saying that regulation should be tightened in boom times and relaxed in tough times, which is what should have happened, making the whole thing “counter-cyclical” as Andrew Verity called it this morning.

However, we are where we are and whilst some of the measures may mean well Mr Shapps is right to be concerned about the consequences.

Rightly or wrongly the housing market is important to the economy as a whole and if we cut out whole swathes of borrowers from the market now lending levels will stay low, repossessions will rise and house prices could fall dramatically.

It may seem rich to say now, but lenders have been quick at self-regulating, cutting out self-certification, high LTV lending and pricing for risk. Whilst no-one wants a return to the days when you just needed a passport and a smile to get a loan, there is not much to be gained now from, as Mr Shapps said, “micro-managing what should be a naturally competitive market”.

Limiting someone to borrowing 30% of their net income, as an example, may sound nice in theory but in practice raises many questions, not least the question what is someone’s income?

Not everyone is straightforward, should someone with children and committed expenses be able to borrow the same as a single person with no dependents and no debts? One size does not fit all.

Affordability is key and lenders now have robust affordability calculations that must surely be more relevant than simply saying you can only borrow 3 times your income.

Also, when owning a house peoples lifestyles change, it is part of growing up. The FSA seem to be assuming that people behave in the same way with and without a mortgage. Most clients I see are all realistic that their monthly “entertainment” expenses or savings will change once they have a mortgage.

Is it also really worth banning self-cert when no lenders offer this product? Or ending interest-only loans when this is a legitimate repayment method for many people. The CML do not believe interest only is detrimental to the market and neither do I. The key is around the advice process.

The focus needs to be on making sure every customer gets proper advice and fully understands the costs and responsibility in taking a mortgage, and how rates can change. Today a First Time Buyer with no experience can still borrow vast amounts of money direct from a lender with no advice and this is what needs to change.

So what do we think can be gained by today’s meeting?

Well we don’t really know if this is just political posturing or if the Governments views will fall on deaf ears, but the FSA wanted feedback from all areas and the Government of the day have every right to raise their concerns.

Whilst I do not expect critics of the MMR to be cheering as Mr Shapps waves a white paper declaring peace in our time, discussions between the two parties should have started ages ago and should be regular.

The best outcome is a sensible partnership between government, regulator, lender and broker working together to ensure customers are given all the information and tools to be able to make their own choices in acting responsibly.

In other words making sure that every person obtains the proper advice they need.

It seems that there are many struggles of this type going on in all walks of life at present. The small business against the big boys, local shops battling supermarket giants and the average person trying to get loans from big banks. There are more battles to come no doubt with the emergency budget on Tuesday bringing the widely expected tax increases and cuts, meaning many local communities are gearing up for a big battle to save services that are important to them.

Meanwhile, there has been lots of talk about the changes to the FSA and how this will affect not only all of us in the finance industry, but the wider economy as well.

As with any proposal such as this the devil really is in the detail, but it is interesting that whilst these changes were made in order to try to simplify the much-maligned tri-partite system, there now seems to be more than 3 new bodies to be created! No doubt these will be filled with most of the current employees of the FSA and surely the creation of these new bodies will come at quite a cost.

Would it just have been simpler and cheaper to install Mervyn King as Hectors boss? The FSA has no doubt learnt painful lessons from the last few years and should in theory be well placed to move forward.

The fact that one person is now in charge and has clear responsibility is of course sensible and long overdue. Mervyn is quite right to ask how can he assist in bailing out banks in the future without a detailed knowledge of their day-to-day practices? The Bank of England is the right choice to ultimately regulate the banks themselves.

However, there is still the unknown question as to how far the new body is going to seek to “control” lending practices, as it is a dramatic move to set specific lending policies for banks that are, in effect, independent businesses. Ultimately this says that lenders cannot be trusted to operate as a commercial entity themselves which, unfortunately in some recent experience, seems to have been the case.

Although there was no specific mention in the Chancellors Mansion House speech of the new entity actively restricting for example, Loan-to-values, there are still whispers that this could be the case. Whilst I have no issue with sensible guidelines being set down which lenders can refer to, simply stating that you cannot borrow over 75% LTV, for example is perhaps too simplistic. Lenders did not get into trouble just because they were lending at high loan-to-values, but because many of the business models were flawed and relied on borrowing money from elsewhere without any Plan B.

The real issue of course, is around risk to the lender, whether they are pricing correctly for that risk, assessing the client’s ability to pay and setting aside enough capital to cover the risk. It does seem sensible however to look at an overall risk cap percentage for major lenders so not all of their lending is based in higher risk areas.

What would be more prudent is to look closely at the customer’s ability to pay the loan, with careful consideration given to self-certification and “fast-track” mortgages and ensuring that full and proper advice is given to all customers who walk into a branch to get a mortgage. There are still too many instances of borrowers being able to get large mortgage loans without any advice.

This “advice” issue is of paramount importance and there have been some encouraging signs from the FSA recently that a level playing field for mortgage advisers, whether independent brokers or in branch, should be in place.

It should be remembered that the Government also has to think carefully about the health of the housing market and first-time buyers already struggling to get on the housing ladder. Deposits in London especially are hard to raise as it is, and if these measure are too prescriptive and draconian the whole 1st-Time Buyer Market could be severely restricted for years to come.

The balancing act is for any new rules to effectively ensure that lending institutions are more secure and enable them to compete effectively, without ultimately punishing the borrowers themselves.

Of course we must give this fresh, new approach time to work and we can only hope that they take time to engage the industry, listen to the concerns of brokers, lenders and the public alike and come to some sensible conclusions for the benefit of us all.

As the Flight of The Conchords manager, Murray might say, “Imagine that!”