AMI's latest report, ‘The UK Mortgage Market - a comparative study reflecting US and European influences', questions whether regulatory actions or inactions had the required effect in the UK over the last 5 years. Instead, AMI argues that developments in the UK are the result of a wide range of other factors including macro-economic policy that produced similar trends in other countries with vastly different regulatory regimes.
The report was drafted by Dr Oonagh McDonald CBE, former MP, Treasury spokesperson and FSA Director. AMI's paper is intended to inform the FSA consultation into mortgage market regulation starting in October, first announced by FSA Chairman, Lord Turner, in May.
Key points include:
Sources of problems in the US market were not replicated in the UK
House prices in the UK are affected by demand and a lack of supply much more so than elsewhere
House price bubbles are not caused by lax lending
Limiting the supply of funds or the price of those funds is likely to deflate prices temporarily, but is only an artificial constraint and will create the next bubble when the supply of funds improves
Applying Loan-To-Value ratios as a product control is not appropriate and will neither affect demand nor avoid asset price bubbles - we need more sophisticated models such as the loan to average household disposable incomes ratio
Robert Sinclair, Director of AMI, said: "In May, Lord Turner set out a number of areas that he felt the regulator should review. We look forward to the full consultation paper in October, but we urge caution before the FSA introduces unnecessary regulation that is unlikely to have the desired effect on the UK market.
"If the FSA and the Government wish to exert greater control over house prices, product regulation is not the answer. The growth in house prices is impacted by a wide range of macro-economic policies or more specific government policies, such as reducing the availability of social housing or removing the restrictions on the supply of new housing units, whether new build or the adaptation of existing buildings or land use.
"There were fundamental differences between the UK and US mortgage markets. US non-prime lending peaked at about 32% of their market, while in the UK it did not get above 12% of mortgage lending. In addition the ‘originate to distribute' model was the fundamental structure through Freddie Mac and Fannie May, while in the UK it was a much smaller proportion of the market.
"Our report shows that basing assumptions on ratios of mortgages to rents, loan to average income, or mortgage payment to income ratios are inadequate measures. The more appropriate measure is the loan to average disposable income, preferably on the basis of household income, taking into account the growth of two earner households, sometimes with rapidly increasing anticipated income and job security."
AMI has called for further empirical research by FSA in the following areas:
Arrears and possessions; to determine how many are caused by unemployment, illness, divorce, other family emergencies and how many by over-borrowing on the part of the mortgagees
Mortgage equity withdrawal; to evaluate how much was withdrawn by the over-fifties to supplement income; by other age groups and for what purpose; and finally, what proportion of those taking equity out of their homes have been able to manage the increased loans without difficulty
