Clearly, the government is keen to reinforce the message that, in seeking to improve the flow of credit through a nationalised bank, it does not want to encourage lending and borrowing at previous LTV levels.
Lenders completely understand the instinctive backlash against 100% mortgages. For months, they have been steadily adopting more conservative LTV ratios in any case. Banning 100% mortgages is essentially irrelevant today given that neither lenders nor borrowers have any appetite for them in current market conditions. But it is right to consider how these issues should be dealt with in the longer term.
Recently, lenders have been trying to manage the tensions between a range of conflicting objectives demanded of them by government, in particular between the desire to make new lending more widely available and to lend more cautiously and prudently, because of higher risks. Now the government finds itself in a similar position.
Gordon Brown acknowledged this juggling act in his article in The Observer. “We have got to get the balance right between serving home-owners better and encouraging responsibility in the housing market,” he wrote. “This is a duty on banks and building societies, but we have also asked the Financial Services Authority to look at how in the future we should control new mortgages for more than 100% of house value.”
Of course, there must be a debate about the best way to regulate mortgage lending in the future – but not yet (see Financial stability should be FSA’s priority).
The fact is that the main reason for mortgage arrears is not high LTV borrowing in itself but a loss of income, either through unemployment, short working or a relationship break-up. Even in the early 1990s, when a significant number of borrowers found themselves in negative equity, it was loss of income that triggered at least 70% of possessions, according to the Survey of English Housing.
So, is lending at 100% irresponsible if it is affordable for the borrower? And are borrowers acting irresponsibly without saving for a deposit first?
Clearly, the more you borrow – and the less equity you have – the more difficult it is to weather even a temporary loss of income. But is high LTV lending always “bad,” even in current market conditions?
What about offering a lifeline to an existing home-owner who wants to move and may already be in negative equity, but who will remain in his job and is capable of maintaining his mortgage payments? And what about shared equity mortgages in the affordable housing sector, where the borrower does not pay a deposit? Are these government schemes to be re-structured?
When market conditions change and borrowers can see that house prices have stabilised or are beginning to rise again, attitudes to borrowing at higher LTVs may change again. And in those circumstances, tighter regulation of first-charge mortgages might not provide the protection the government is looking for, in any case. What if borrowers simply circumvent restrictions on LTVs by topping up their borrowing with more expensive, unregulated second mortgages or unsecured borrowing, perhaps on credit cards?
The government wants to encourage activity as a means of helping first-time buyers, many of whom are frozen out because of the size of deposits being asked of them in the current market. Greater participation by first-time buyers is, in turn, an important component of the healthier mortgage market that the government – and lenders – want to create. Access to the market for first-time buyers needs to improve, although we agree that if they make a personal financial contribution they are more likely to be committed for the longer term.
When it is clear that we are near the bottom of the housing market, would it be more appropriate to offer more generous LTV ratios to first-time buyers who can afford them, perhaps underpinned by mortgage indemnity insurance provided by the government? Given that would-be first-time buyers may also be saddled with student debt, will there be enough opportunity for them to take advantage of the correction in house prices relative to their incomes, without being able to borrow at a higher LTV?
There are other questions. Is the “ban” on 100% loans a sign that the government is moving away from its target of 75% of the population being home-owners? And, more particularly, is the government clear that it does not want long-term mortgage rationing to become the norm, as it was before de-regulation?
Perhaps the real issue is about sensible lending and borrowing. And perhaps that is where the FSA should be focusing its attention, rather than on the banning of specific products. What we really need is better understanding of risk, both by borrowers and lenders, and better protection against it through economic cycles.
