Britain’s financial regulator plans to force mortgage lenders to check the income of all borrowers, scrapping so-called “liar loans” blamed for helping to fuel bad debt problems at the heart of the credit crunch. In the first draft of plans to overhaul the UK mortgage market, the Financial Services Regulator said on Monday it would also impose affordability tests for all mortgages, but stopped short of capping loan value to property price ratios that could have effectively banned 100 or 125 percent mortgages.

The initial findings of the long-awaited review — which reflects the increasingly hands-on approach of a regulator widely criticized in the aftermath of the credit crunch — also called for the FSA’s scope to extend to buy-to-let mortgages. “There are clearly certain types of loans which should not be made and there are clearly some consumers who should not place themselves in a position where they wouldn’t be able to repay that mortgage in the future,” FSA CEO Hector Sants said.

Sants told BBC radio that risk was useful to innovation, but warned the mortgage market had simply become too complex. “Back in 2007 there were something like 10,000 different mortgage products available, something like 3,000 or so products available in the sub-prime area. I think that’s a level of complexity we could well do without,” he said.

“We... call on the industry to start making changes immediately. They don’t have to wait for final rules to adopt fair and responsible lending practices,” Financial Services Secretary to the UK Treasury Paul Myners said.

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