Broadly speaking, there are two main options for the future.The first is to simply allow mortgage lenders to operate their own policies and lend as they see fit.This is business as usual. The second is mandatory lending guidelines for mortgage lenders to ensure that the mistakes of the past are not made a third time.The scale of the problem is such that this must be the preferred option. By and large the policies should not affect the operations of responsible mortgage lenders, the report says.
Limit the level of wholesale funding
There should be a limit on the level of wholesale funding, of no more than, say, 20percent of retail deposits for specialist mortgage lenders. This is likely to restrict lending, at least in the short term, but the collapse of the wholesale market has already had this effect. This restriction could not be easily applied to the large banks such as Lloyds/HBOS or HSBC who may utilise internal wholesale funding, and it would be difficult, if not impossible, for overseas-based bank lenders such as Banco Santander which now controls Abbey National, Alliance and Leicester and part of Bradford and Bingley, but it was the specialist mortgage lenders who were the most dependent on wholesale money markets to expand their lending rather than the commercial banks. Restrict the amounts lenders can lend for non-residential property
There should be restrictions on the amount of money mortgage lenders can lend for non residential property.Giventhatthisisnotpartoftheircorebusiness,andgiventheproposed limits on wholesale funding, it is suggested that, with the exception of loans to registered social landlords, mortgage lenders should not lend any money to non-residential property developers or for commercial purposes.
Limit the loan-to-value ratio
There should be a maximum loan-to-value ratio of, at most, 95 per cent, and possibly 90 per cent. And lenders should not offer additional loans to buyers. This may have the side effect of limiting the number of young first-time buyers who can enter the market, but it will mean that they have some equity, and that they and the mortgage lenders are protected to some extent against falling into negative equity. It is notable that in Switzerland and Germany, both countries that have not experienced house price booms, the maximum mortgage is generally 80 per cent of property value, which requires potential buyers to save for a deposit.
Limit house price-income ratios
There should be a limit on house price-income ratios, possibly to four times single income and three times joint income, to try to ensure that new buyers have the ability to meet mortgage repayments in the event of interest rates rising once again.
Reduce the number of self-certified mortgages
There should be a reduction in self-certified mortgages, where the borrower simply states their income with no need for documentary support.
Restrict buy-to-let mortgages
Mortgages for buy-to-let should be restricted to a maximum of 75 per cent of independently assessed value of a property (not the sale price).
Stop offering bulk mortgage deals
Mortgage lenders should not be able to offer bulk mortgage deals to the developers of new build developments.
Prohibit new mutual to quoted conversions.
There should be a prohibition on any new conversions from mutual status to quoted companies. Demutualisation has been a financial disaster for shareholders, bondholders and the taxpayer alike. While this may seem to be shutting the stable door after the horse has bolted, there is still value in limiting any further demutualisations.
Stop performance-related bonuses and stock options
The directors and top executives of mortgage lenders should not receive performance related bonuses or stock options that are likely to encourage over-lending. Any bonuses should be deferred for several years, and be related to the levels of arrears and repossessions, not the level of new business generated.
Prohibit the buying of mortgage portfolios from other lenders
Mortgage lending should be self-originated. There should be a prohibition of buying mortgage portfolios from other lenders to increase the size of the mortgage book. As we have seen, this is generally a guarantee of high default levels.
Introduce bi-annual reports to the regulator
All mortgage lenders should be required to submit bi-annual reports to the regulatory body on the volume, nature and composition of their mortgages, including data on the loan-to value and loan-to-income ratios.The regulator should have powers to limit certain types of lending if they seem unduly risky.
These proposals may, in the short term, limit the level of mortgage lending, but it can be argued that the level is already depressed as lenders cut back their previous generous lending policies. At present, good mortgage deals require a deposit of 25 per cent of the purchase price. But the objective of government policy should not be to see a rapid return to the previous over-inflated level of easy mortgage lending, but a move towards a policy of sustainable lending.
This does not necessarily mean a return to the restrictive mortgage market that prevailed before the1980s. The competition between banks and building societies should ensure that there are a variety of mortgages on offer. What it does mean, however, is that there should be no return to the policies of the last few years, where the name of the game was to grow the share of the market and overall mortgage volumes by expanding into ever more marginal and risky market areas.The objectives for mortgage lenders should be responsible lending and risk minimisation.
Peter Bolton King, Chief Executive of NAEA commented: "The NAEA does not think that millions of British homeowners will sympathise with this report's assertion that the falling value of their property is "a welcome necessity".
"It is right and proper that irresponsible mortgage lending is discouraged. However there is no justification for sweeping measures that could prevent responsible first time buyers accessing finance that will allow them to buy their own home.
"There is a balance to be maintained between responsible and draconian - and this report has erred on the side of draconian."
Ian Potter, operations manager of ARLA said: "When we at ARLA were involved in the formation of the buy-to-let concept in the 90s, we set out recommendations to ensure that the buy-to-let market was founded on responsible lending.
"A key element of this was loan-to-value ratios of 75%, so the IPPR's recommendation is welcome in encouraging the market whilst keeping it in sensible check. The buy-to-market is fundamental to ensuring necessary levels of housing stock to offset projected population growth and the Government is right to try and ensure its long-term health.
"ARLA would also recommend that anyone thinking of entering buy-to-let do their homework first to ensure they have the best chance of making their investment a viable one. A licensed letting agent will be able to help advise any prospective landlord in this way."
