The Financial Services Authority (FSA) has released a paper setting out its proposals for the major reforms which it believes is needed to refine and regulate the current mortgage market.

It stated within the report that because the buy-to-let sector is currently unregulated it has, as a result, been the root cause of its downfall as there are no specific standards for lenders to adhere to. However, the report did acknowledge that it has proved very beneficial to the mortgage market.

Subsequently, un-regulation has resulted in an increase in both arrears and repossessions of buy-to-let property with consumers having been attracted to the unending appreciation of property prices and not the rental income that would be achieved by them. It stated that with the current low interest rates, which should be raising the affordability of interest-only loans, buy-to-let arrears are increasing, displaying a clear indication that the sales did not adequately take into account consumers’ best interests.

Jon Pain, the FSA’s managing director of supervision, said: “The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress. We recognise that we need to bring about a step change in regulation and we need to act now to address the issues we have identified.

“The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms that we have announced will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”

According to the report, regulation of the buy-to-let market will improve the quality of mortgage products and aid in the lending decisions made, thus improving the sustainability of the market.

Michael Coogan, CML’s director general, added: "We agree with the FSA that regulation in itself cannot resolve the problems of the recent market. However, we also agree that clearly delineated responsibilities, which remove regulatory ambivalence, will help lenders, intermediaries and consumers to know where they stand, and to accept the consequences of their actions.

"As always with regulatory change, the devil may be in the detail. But we welcome the consultative approach, and look forward to working with the FSA to ensure that the objective of regulatory fairness between lenders, intermediaries and consumers is achieved in practice."