Oct 19 2009
Who should be stopped from having a mortgage?
The BBC asked the right question this morning in response to the Regulator’s comment that we were now going to see tougher mortgage regulation. Who currently with a mortgage will not be able to refinance it? Which groups of poeple who would like a mortgage and currently can get one will no longer be able to?
As always when you try to find the small print things are not quite as they seem in the spin. Maybe the regulation will be tougher, maybe it is just for a soundbite. If it is truly tougher, then I fear it will be the self employed who find it difficult to prove their earnings. A large number of people who took out mortgages in the days of excess could be at risk of not being able to refinance if their mortgages time expire in the next few years. Will that make the world a better place?
The good news is I take it from the latest spin that the government at last concedes that house prices ran up too far too fast thanks to excess mortgage lending. They spent years telling us the reason was a shortfall in the number of homes built, when it was obvious to any sensible observer that 97% of the homes sold were second hand and their prices were driven higher by excess credit. I doubt however they will say sorry for their gross misreading of the situation.
Nor will they revisit the argument I had with them over what kind of mortgage regulation is needed. I said we needed strong regulation of cash and capital at mortgage banks. If you do that it limits the total amount of mortgage money available, and forces the banks to make more sensible judgements both aboutthe level of house prices and individual credit worthiness. The government introduced a whole panoply of new regulation of the process of granting mortgages. This patently did not work, as it s imposition coincided with the worst mortgage crash any of us have lived through, with the collapse of several mortgage banks and the big fall in house prices. If only they had regulated the right thing, as I urged, and left the process alone, all would have worked fine as it used to.
Today’s announcement is regulation without the numbers. What we need to know is how much money in total mortgage banks are allowed to lend, given the current state of their balance sheets. If they want a recovery they need to relax a bit. If they want to carry on fighting the last war which they lost, they should carry on tightening.
25 Responses to “Who should be stopped from having a mortgage?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
I took out my first mortgage in 1996, when I had been self-employed for four years. I was obliged to find a 40% deposit, but I was able to borrow six times my proven income. It was assumed that my accounted taxable income was slightly lower than my actual income, so there was a little flexibility with the multiple. However, the terms were rather draconian.
The interest rate was about 8%, and I made sure that I could afford repayments based on the 15% that was (at the time) recent history. When I remortgaged a couple of years later, I could prove that I had a good history of making payments. My recorded income was no longer quite so important.
The bank couldn’t really lose because of the large deposit. If the bank couldn’t lose, neither could I – even if I had defaulted on the repayments, I would not have been left without a house an in debt.
If you want to borrow a big multiple of your (combined) salary, put down a big deposit. If you don’t have either, prove that you can sustain payments over a period of time – set up a standing order into a regular savings account as your proof of ability to pay. It’ll also come in handy for the deposit!
My moral is simple – flexibility is fine when combined with responsibility and opportunity; just don’t expect everything today. If it’s worth having, it’s worth preparing for. Draw that up as legislation….
Who shouldn’t get a mortgage? Well, perhaps the list should include known mortgage (enthusiasts-ed), such as Peter Mandelson.
The normal sanction against any business being mismanaged is that of going bankrupt. This should apply whether it is a bank offering loans at too cheap a rate or, say, a computer company selling its goods at too low a price. In both cases it should be the responsibility of the directors to keep the company solvent and hopefully make an acceptable profit.
The problem is that the banks were not allowed to go bankrupt, and thus the only incentive to be prudent was removed. The statement that banks are to be made responsible if their customers default is ludicrous, they always were responsible and still are, in theory.
The best solution would be to break up the big banks until they are of such a size that they can be allowed to fail which would put the responsibility well and truly back with the directors. This, with provisions banning directors from bankrupt companies holding any other directorships, would soon ensure that they took their responsibilities more seriously.
“then I fear it will be the self employed who find it difficult to prove their earnings”, why will they? They produce accounts each year and pay their tax, they can provide this information to the mortgage provider can’t they?
The easiest way to regulate is to do what the Germans do and allow mortgages only up to 60% of the value of the house and add capital gains tax on any gains. This way people actually have to save to buy a house and as its an investment, the gain is taxed thus keeping prices down.
It amazes me how much capital the UK wastes on chasing up house prices rather than investing in infrastructure or into the productive business sector. Houses do not create wealth only the illusion of it.
Debt should be taxed as if it were income.
In a Another way of understanding the financial mess you told us about Mr and Mrs Public sector who took on an extra £17,500 in borrowing.
This should be taxed as income.
There is no evidence that any regulator or finance minister saw the financial crash approaching. Indeed, it was their policies that deliberately inflated the bubble. Therefore what faith can be put in an “enhanced” regulatory regime now? Answer: none. The simple solution is to explain to anyone seeking to make a deposit or take out a loan that the financial institution they deal with is not and never will be underwritten by the state. Once that idea is firmly fixed in the minds of borrowers and depositors then sanity will return to the market. Depositors will demand higher levels of security and will accept lower levels of interest in exchange for it. Lenders will stop making “liar loans” or loans that exceed the value of the collateral. One aspect of this process is that house prices will have to fall. But this will make housing more affordable to first time buyers and, in the long run, will create a healthier and more sustainable market.
By the way, inflation has not been driven out of the market. Far from it. The mid-noughties in the UK were characterised by low consumer price inflation, courtesy of the export of manufacturing jobs to low cost producers, but massive asset inflation caused by a soaring money supply – one figure I saw quoted the money supply increasing by 14% a year during 2005-06. Since Mr Darling hit the money printing presses, the FTSE has boomed from under 4,000 to over 5,000 and the fall in house prices has been arrested and prices are even increasing, if this morning’s report from Rightmove is anything to go by. Sure, there is a lot of overcapacity in the economy, caused by the reckless monetary policiies of Messrs Brown and Greenspan, but that is being cut back aggressively (in a way that the public sector is failing so signally to do). Once the monetary merry-go-round stops, as it must, we could easily be left with the worst of all worlds – zero or falling growth, because the private sector has been swamped by the tax and spend demands of the public sector – and inflation caused by Mr Darling’s printing presses. It can be fixed, but the solution is one that no-one is grapsing: cut taxes, cut spending, put the mafia state back in its box and let the wealth creators do what they do best.
I’m sorry John but I think the prime cause of the bubble was the shortage of housing. 3/4s of housebuilding costs are regulatory & these regulations limit the housing supply. We could have virtually unlimited inexpensive modular housing.
Bubbles appear where people people think supply will not increase to satisfy demand. That was what convinced people that house prices could keep on rising forever.
That house prices are very related to supply is shown by the Irish & Spanish crashes. One may argue that these crashes have been bad for them whereas the miraculous maintenance of our economy consisting of becoming rich owning our homes has not fallen so badly. However the Irish do still have houses for their people & an Irish house, while half the value of a British one, still keeps the weather out equally well.
Real booms are created by investment in real productive enterprises. Houses that cost 4 times what they should & housing speculation soaks up money that could go into real investment.
I sold my stake in my business in 2008 and when I had to re-mortgage later that year, I had no income. I would not have got a mortgage at all if these regulations were in force.
What I did was talk to my lender who looked at my history of mortgage payments – 18 years, no missed payments – and the cash I had in the bank and recognised that I was a sound risk.
Too much regulation is tick-box, checklist stuff which neglects proper, personal assesment of risk. Because you have ticked the box, it’s fine. Except, it isn’t.
It is essential a socialist construct, based on process. It takes the personal out of it and that is why it fails.
gyges is right. Consumption loans should be taxed at some percentage of the capital value per year. This would have the effect of higher interest rates without actually imposing higher costs on business and industry which would still be entitled to untaxed loans.
The tax should be paid by the lender (who would naturally pass it on to the borrower) and the enforcement should be that loans on which the tax wasn’t paid would be unenforceable in the courts, thus allowing friends and family to make untaxed loans to each other on a trust basis and also forcing foreign banks to pay the tax if they ever expected to see their money again (I wouldn’t want to give foreign institutions an advantage in our mortgage market.)
Regulation has totally failed in the mortgage market. It’s not only the lenders, but also the surveyor who overvalues, the mortgage broker who pushes through falsified documentation, the solicitor who connives to report an inflated price to the Land Registry that doesn’t reflect an under the table discount provided by the developer, and the estate agent and buy-to-let shell company who organise it all. It only takes a small proportion of fraudulent house sales to infect prices for a whole area on a comparability valuation basis.
The money to finance the housing bubble – some £700bn extra since 2000 – has almost exclusively been borrowed abroad, so for the country’s solvency to improve we must pay down that debt every bit as much as bringing government borrowing under control. House prices remain grossly inflated, and need to fall in real terms by 40-50% to regain sane levels.
It is good news that remortgaging has collapsed as a business, since remortgaging had been used to borrow extra money, often used for consumption rather than housing investment in repair and extension. It would appear banks are preventing their existing customers from gearing up any more. We should perhaps return to the purpose test: mortgages should only be granted for housing investment or as a form of secured business loan.
To try to answer your question, first on the assumption that hyperinflation is not going to be allowed to deflate our debts: those who do not already have a mortgage should be prevented from getting one until house prices have returned to sane levels. They already have their share of the government’s debt (including the off balance sheet elements) hanging round their necks, and increasingly the young are saddled with student debt as well. There is no point in adding to the burden by overpaying for a house. An exception might be made for those prepared to sustain a substantial loss on their house(s), provided they can offer suitable collateral.
If hyperinflation seems in our stars regardless, then paradoxically we should all be prevented from having a mortgage – otherwise the incentive becomes to take on the biggest possible debt, guaranteeing hyperinflation and penury for all.
It seems at the moment as though much of the support for the dead cat bounce in house prices comes from those who have substantial investment funds which do not earn an adequate return in a savings account seeking a safe haven against inflation. They fear the volatility of other inflation hedges such as forex, gold and commodities, and the risk of stock and bond market collapse, as these markets are operated by the banks (even commodities markets are now dominated by banks rather than commodity industry companies). The irony is that in the end they will make a large real loss on their house investment anyway.
1) Buy-to-let investors, particularly those incorporated as limited liability entities.
2) Speculators intending to short the cash against the housing stock, particularly those incorporated as limited liability entities.
I don’t see the need for regulation as this should be common sense to any financial institution that wishes to remain solvent.
@ Ian Jones
“It amazes me how much capital the UK wastes on chasing up house prices”
Quite right, but instead of putting Capital gains tax on house sales what about removing the artificial shortage of land imposed by our planning system? If a farmer wants to sell his farm for housing, or someone wants to build a house on their horse paddock or back garden let them. Let the housing follow the demand rather than a regional planning policy. If a plot stopped costing £120,000 then more young people could afford housing and there would be more incentive to invest in industry rather than housing .
a-tracy
Yes the self employed will suffer, because their income is usually variable.
They can run short of work, they can become ill (and not be able to work) etc etc
A good track record only takes you so far in this box ticking society, and a variable income usually means that you are assessed on the lowest earnings.
I would suggest that many self employed people are going to earn considerably less this year than last, given the state of the economy.
Having said that, you should always try and incorporate a good safety margin on your finances when planning ahead in order to try and avoid problems.
Over the next few years we face a gradual inflationary spiral.
Why?
Unions demanding “fair wages”, QE, heavy debts by the government, lack of a decent GDP to earn worth through trading, inevitably increasing welfare benefits to all and sundry.
I am sitting in a house that was paid for by inflation. My (decreasing) life savings were gained by a steadily increasing house price spiral.
Those who are in steady work can bite the bullet and do the same as my own family did – invest in bricks and mortar.
Those who are not in steady work are screwed.
Hey – that’s me!
I can’t see what all the fuss is about with regards checking on the borrowers. When I took out my first mortgage, some 45 years ago, I had to save regularly with the building society for at least a year before they would consider me. Then I had to produce two years’ salary slips and bank statements to explain where my income was going. My wife’s earnings were not taken into account, and I was offered a maximum of two and a half times my salary, subject to my putting down at least 25% of the purchase price.
This was the Co-operative Building Society, now part of the Nationwide. Perhaps this prudence is why the Nationwide has not had any problems with the recent credit crunch.
The choices are simple John.
1) Regulate who can get a mortgage. Lenders must see evidence of affordability.
2) Regulate that lenders have enough capital to handle a collapse in house prices which is likely to arrive at the same time as an increase in reposessions.
3) Do not increase regulation.
I’m against option 2 because it makes our banks permanantly less profitable. Our banking industry is possibly the most competitive in the world, and we simply do not need to harm it.
I think that option 3 is unlikely as the public, parliament and regulators now have an appetite to do ’something’.
That leaves option 1. Self cert mortgages were typically offered as sub-prime anyway. The most competitve deals were only available on self-cert as the industry was at the peak of the bubble. If we lose self-cert mortgages then who actually suffers? Lenders that specialise in them – if there are any actually left. Brokers who specialise in “liar loans” – in the peak of the crisis a manager of one of these “mortgage shops” told me they would give anyone a mortgage, as long as they weren’t in bankruptcy proceedings. Why? Because they believed house prices would never go down beyond the deposit. Self employed people who can’t prove their income. Self employed people can prove their income and affordability. The only exceptions would be people who paid for marginal costs in cash, accepted payment in cash, and paid their bills in cash. Sadly that type of people can simply learn to live with banking their money. We might be able to make them pay their fair share of tax too. And the final group of people who lose out? Sub-prime customers who can’t afford the mortgage in the first place.
Placing crippling capital requirements on banks is very bad. No extra regulation seems to be against what all concerned parties are saying. The big banks will happily wave goodbye to self cert mortgages.
I’m a bit worried that these proposals will lead to a system of Mortgage Apartheid.
1) Easiest to get mortgages – Public Sector Workers
2) Riskier bets – private sector workers
3) Even Riskier – self employed, company directors.
For an export lead enterprise economy – who ought to be most important?
Which organisation pronounced in August 2007
“We see no need to continue to regulate the provision of mortgage finance,as it is the lending institution rather than the client taking the risk”?
Reply: and went on to say the banks should be under tighter control on cash and capital, exactly what was needed to prevent the disaster Labour presided over? Yes – how can you argue you want more of the very kind of mortgage regulation that so obviously failed in 2005-7? Thanks for reminding people.
I was made redundant six months ago as part of a 10% workforce reduction at a major publisher. My wife and I subsequently set up our own company.
As could be expected, we haven’t exactly made a fortune yet, and there have been months with almost no income.
So when our two-year tracker deal came to an end this month, we were worried that we’d be stranded on the SVR for the next three years.
Fortunately, the bank we have our mortgage with offered us a small range of new mortgages with no questions asked about our current income, so we should now be OK for another couple of years.
However, if the new regulations were in force, we might have been unable to get any deal at all, and we would have been left on the SVR for several years, leading to potentially much higher mortgage payments at a time when we can afford them the least.
Surely there’s no point in making stricter rules for people remortgaging, even if the rules are needed for people taking out new mortgages.
Quite so. How is it that a government that could not run a whelk stall is minding everybody’s business except its own. It is not the blind leading the blind, but the blind leading the sighted.
Why shouldn’t people go out on a limb, taking a mortgage that they can just struggle to afford?
It may or may not be advisable, but then maybe the applicant is taking a gamble on future earnings, and the mortgage provider may be happy to take the business.
Why shouldn’t a person with CCJ’s obtain a mortgage? The provider, historically, has made the best returns from this business – okay things did go overboard on this front, but much of the problem was with fraudulent disclosure.
If all the facts are known, both lender and applicant know the score and the lender makes sufficient provision for a higher incidence of default, then so what?
As a young articled clerk I could only scrape onto the property market by taking out a very marginal loan.
Why does the state have to do everything for us?
Speaking from the experience of 25 years in retail financial services, 16 of those running my own Retail FS business, I can state categorically that the FSA proposals are totally unworkable in real life. This is the the FSA thrashing about tryin to justify its existence, and, I would bet, making these proposals at the behest of their puppeteers, the government.
My business has operated on a fully transparent fee charging basis sisnce 1992. I have done loads of self cert mortgages. I only have doubts about one borrower. All the SC were done with people who are very committed to making their own livings and fully appreciate the need for a good credit record. I pre underwrote all the borrowers and refused to act for those who patently were not of good quality. In the early years I used a variety of lenders including UCB Homeloans – now closed to new business – who eventually became part of Nationwide. UCB had been doing SC for yonks. They were very good at it. They had a very low delinquency rate, far below high street lenders. As the Brown Credit Boom advanced UCB became increasingly uncompetitive as they refused to take on business on terms that they knew from experience were going to be unprofitable. Similarly our mortgage work declined as we found more and more applicants were of low quality, or they went elsewhere to less scrupulous intermediaries – mostly estate agents – of bought off the page.
It was totally clear by 2000 / 2002 ish that the UK housing market was going to come unstuck, and the lenders with it. By 2004 / 2006 this was morea than obvious to anyone with a brain. SC was being obtained for thousands of unsuitable borrowers as too much liquidity chased too few borrowers.
Now though the world has changed. SC is and must remain available to the Self employed and those on variable income. It allows sensible, self motivated and responsible people to buy houses and get on. Now that Brown’s Bust has come all the intermediaries that remain standing are like me and the lenders ditto.
I could go on, but I know an awful lot about the mortgage market – and how to fix it – but you’ll all get bored.
Most importantly the FSA stupidity strikes another blow at the very core of freedom and responsibility. It is more nannying. It will destroy wealth.
Did you also know that another very good self cert lender was the Bank of Scotland?
I have just remembered another factoid that might be of general interest.
During a recent visit to our offices of the area Nationwide rep he gave us some very interesting figures, only one of which really stuck in my mind. The Nationwide spends 1%, yes one percent, of its total costs marketing to intermediaries yet intermediaries produce most of its mortgage business. I cannot remember whether it was 60% or 80%, but it was way more than half, and remains so even, or especially, in this market.
Most professional mortgage intermediaries, and here I do not include Estate Agents or other bucket shop operations, are very good at pre underwriting cases and packaging them properly with all the necessary documentation properly presented. They also work with their clients for the long term as that is where the value lies for us. Repeat business.
Self Certification business will now decline to levels that are ‘appropriate’ and can be serviced by skillful lenders at low cost of acquisition and with very low default rates. The FSA are again about to destroy the market and the livelihoods of a lot of people as well as denying sensible re-financing to thousands of consumers who will be precipitated into repossession or forced house sale. They must be stopped.
I took out my mortgage two years ago on a two year fixed rate. That is now due to expire and I am deeply concerned for future interest rates.
I am a single chap in a job paying £25K a year. I don’t go out much and try my best to keep my bills down. I spend very little on myself and usually save for it.
If mortgages get suddenly higher I’ll be stuffed. I won’t be able to plan properly and any idea over over paying or saving money will be moot. I’ve gone to banks with bank statements, savings info, SO details, mortgage payments, spreadsheets of income and outgoing costs and getting a mortgage for less than 9% interest is impossible.
I’m frightened of losing my home. I’ve planned, saved and gone without. Now it’s all a crumbling edifice without going to my parents (and lumbering them) I might be absolutely stuffed. Someone tell me what the point is?