Hostile territory

Posted by: Jules Birch

17/11/2010

Is the only solution to all the problems caused by reckless mortgage lenders and borrowers really to allow them to carry on being reckless?

You’d think so reading through the hostile responses to what seem at first glance like sensible proposals by the Financial Services Authority (FSA) to make sure that all borrowers with a new mortgage can afford it.

A joint letter today from eight housing organisations calls on chancellor George Osborne and the FSA to ‘take account the broader impacts of its proposals and to make proportionate changes to regulation that reflect the importance of the housing sector to the UK economy and more importantly the families that live in them’.

They were adding their weight to a vociferous campaign against the proposals by the Council of Mortgage Lenders and a 500-page response that it describes as ‘the most comprehensive submission in response to an external intervention into the market’ in its history.

So what’s all the fuss about?  In its CP 10/16 consultation, the FSA says all it wants to ensure is responsible lending with proposals including:

Its opponents say the plans are far too restrictive. The eight housing organisations say that if they were applied to the 11m current mortgage holders, 5.6m of them would not have got a loan at their current level of borrowing and 2.2m might not have got one at all.

The CML has responded with some similarly frightening stats over the last few weeks. It argues that the FSA proposals ‘do not take into account the self-correction in the market since 2007’ and do not take account of ‘how markets work’ and the impact of the new prudential requirements on lenders capital and liquidity levels.

The arguments seem hard to resist until you think back to what actually happened when during the credit crunch. No matter how much lenders argue that the crisis was caused by sub-prime lending in America, it’s worth remembering that self-certified mortgages (or liar loans) accounted for half of all home loans here in 2007 and that the boom also gave us buy to let, Northern Rock, HBOS and all the rest of it.

I seem to remember remember lenders in the early 2000s arguing that they had learned the lessons of the crash in the 1990s and that their sophisticated credit scoring technques made old-fashioned restrictions such as only lending someone three times their income unnecessary. 

And I notice that several housebuilders are already arguing that the solution is a return to the old days of 95% mortgages and some of the sub-prime lenders that quietly exited the market are beginning to return. So I’m not convinced by the argument about self-correction in the market. 

In an interview in the Financial Times today FSA chairman Lord Turner seems determined to press ahead with what he says is a system designed to prevent future problems rather than further restricting current borrowing.

Except that, as the CML points out, his plans do not just affect the mortgage industry and mortgage borrowers. 

Nothing else seem to be addressing that question let alone answering it. Which must add to the temptation for the government to blank out what happened in late 2007, let lenders and borrowers carry on as before and allow the market to ‘return to normal’. Until next time.