More than half of mortgage loans made between 2005 and 2009 would not have been granted if FSA proposals on responsible lending had already been in place, according to the Council of Mortgage Lenders (CML).
As part of its response to the regulator's Mortgage Market Review (MMR) consultation paper, the CML assessed what impact the proposals would have had if applied five years ago.
It suggests some 51%, or 3.8 million, "good loans" - those that have never suffered payment problems - would potentially not have been made, while an estimated 151,000 arrears and 38,000 repossession cases might not have occurred.
The FSA is proposing major reforms to end excessive loans and crack down on interest-only mortgages. It also wants to impose more rigorous financial checks on applicants.
The CML said it did not expect the impact of the FSA's proposals to be as high on new business as on past business, due to the significant changes the market has seen in the last few years.
However, its analysis suggests the future effect of the MMR could be far higher than the FSA's own impact assessment has shown.
According to the FSA, only 17% of borrowers who took out mortgages between Q2 2005 and Q1 2009 would not have been granted the mortgage they obtained if the proposed requirements had been in place.
But the CML says this figure only takes into account the impact of lenders using a 35%-of-income affordability assessment and did not address other proposed requirements.
These were: assuming the mortgage is on a capital repayment basis with a maximum 25-year term; applying a 20% income buffer to the affordability test of impaired credit applicants; and applying a 2% above the initial interest rate "stress test" to assess affordability if rates rose.
It says this resulted in the proportion of loans affected rising to 51%.
First-time buyers (FTBs) would have been particularly badly hit, it adds, with some 730,000 FTBs between Q2 2005 and Q1 2009 being denied a mortgage under the proposals, despite never showing repayment problems.
Impaired credit borrowers would also have been affected, with 80% denied a mortgage, of which 20% were in payment difficulties in 2009.
The CML says this again suggested the number of borrowers prevented from accessing mortgages despite not suffering payment problems far outweighed the number 'protected' from difficulty.
The trade body stresses it is not against regulatory change and accepts many of the proposals.
But it warns: "Our concern is to make sure the rules which are finally implemented are clear in their intended impact, practical in their implementation, and fair in their overall effect on consumers, intermediaries and lenders alike."
The FSA says its proposals will address the "major failures" that have occurred in the mortgage market in recent years.
"Our evidence shows 16% of borrowers are already financially overstretched and they are facing problems now as a result of their lenders' practices in the past, not the MMR.
"But for now borrowers are also benefiting from historically-low interest rates and house price inflation, which cannot go on forever.
"This is why it is imperative that we take steps to protect vulnerable consumers and ensure lenders are making responsible decisions.
"It is in the interests of all that we get this right: both lenders and borrowers suffer from irresponsible lending."
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