Has MCOB regulation affected the suitability of mortgage sales to borrowers with impaired credit histories?

This paper describes economic research conducted for the second stage of the Mortgage Effectiveness Review. Mortgage Conduct of Business (MCOB) regulation came into effect in the UK on 31 October 2004. This paper tests one of the intended long-term benefits of MCOB regulation to consumers – ‘Do consumers take out suitable and good value mortgages?’ – focusing on the mortgage market for borrowers with impaired credit histories. The rate of mortgage arrears and repossessions has typically been higher among these borrows than in the prime market. Also, such mortgages are almost exclusively available through advisers that customers rely on to identify the best option for them.1 We use arrears, or shortfalls on two consecutive monthly mortgage bills by borrowers, as a measure of how suitable the mortgage contracts were when they were originated. We did not detect a systematic effect of MCOB on arrears rates in the sample. There was no visible step change in arrears rates around the time of MCOB and we estimate in our preferred regression model an effect of MCOB that is very small and close to zero. The sign on the MCOB variable is also not stable to changes in the controls used. We interpret this finding as a lack of consistent evidence for an effect of MCOB on the rate of arrears. Since arrears rates were used as a measure for suitability, this means that we could not identify an appreciable impact of MCOB on suitability.