MSE News: 'Dear Chancellor, don't cap mortgage lending'

Reaper

A cap means only FTB with rich parents would be able to buy? Rubbish. Like anything house prices move with supply and demand. In the past it was too easy to get a mortgage and all that happend is house prices rose and buyers had bigger debts.

Making it harder for FTB to get mortages will eventually lower house prices throughout the market as demand drops (once owners finally accept realistic prices), and people will have smaller mortgage debts to pay off.

In the short term it is painfull for those who bought when prices were high but in the long term everybody is better off.

poppy10_2

If the banks don't want the government to intervene and regulate lending requirements, they shouldn't rely on the government to bail them out when they go titsup due to their reckless lending. They can't have it both ways - either self-regulate and go bust as a result of their risky business practices, or allow the government to restrain irresponsible lending and accept the government safety net.

jamesd

seeke wrote: »

The author is saying that the mortgage cap would be the harbinger of more stop-start economics. But if the mortgage cap is fixed permanently at say 3.5x earnings, there's nothing stop-start about it at all. It would be a prudent way of reducing personal debt levels.

It wouldn't be a prudent way to reduce personal debt levels, it would be a way to harm those with non-standard incomes and penalise those with rapidly increasing pay levels or making use of efficient tax wrappers.

Take someone with nice ISA investments and cap them at 3.5 times their PAYE income. They could end up forced to move their money out of the favourable ISA investment wrapper just to buy a property because their PAYE income happens to be low even though they have plenty of income and capital.

Or take someone who's been using 40% tax relief to accumulate a hefty pension pot and who can use their 25% lump sum to clear a mortgage in a few years. Why limit their borrowing to less than the lump sum that will be available just because they are trying to borrow more than 3.5 times their current income?

Or take someone on £30,000 with a modest lifestyle and someone on £15,000 who's splurging all the time. Why limit the person with modest lifestyle to the multiple needed for the person with the extravagant one? Surely it's the person on low income with extravagant living who needs a tight cap while the person on higher income with modest living should be allowed to choose to spend more of their income on a nicer property?

Better to have flexible lending not based on arbitrary income multiples and assumed normal spending levels but instead based on individual affordability and repayment vehicles.

seeke

James, you make a totally valid point, and I agree that savings such as ISAs and pension lump-sums could and should be used to increase the mortgage size. Mortgage cap rules could be adjusted to take account of these savings.
The reason that I say a mortgage cap is prudent is because it will help to reduce personal debt levels in the UK, which are amongst the highest in the world, and because it will help to stop house prices doing their inflationary thing.

green1970

What matters is that you can afford the mortgage repayments. Every car I've ever had a loan for has usually been worth less than the loan I took out the minute I drove it off the forecourt. Houses, in the main, are a bit more stable than that so why make it harder to get on the ladder - it really doesn't matter if there's a high loan to value for those first few years if the repayments are truly affordable.

opinions4u

poppy10 wrote: »

If the banks don't want the government to intervene and regulate lending requirements, they shouldn't rely on the government to bail them out when they go titsup due to their reckless lending.

Reliance on wholesale funding was much more the problem than poor quality lending though. While Northern Rock's 125% loans weren't exactly clever, they'd still be independent if they had only lent customer deposits.

The likes of HBOS and RBS, biggest bailout "beneficiaries" failed for factors that were nothing to do with UK residential mortgage lending.

Indeed, isn't the market now self-regulating itself by demanding bigger deposits?

The bailouts were so much more about protecting the wider economy than protecting the banks themselves. Indeed, LBG (which consumed HBOS) and RBS will have already repaid most of the special liquidity as provided by the Treasury. The Treasury can also make its own decision on when to sell its shareholding in these banks. Most likely this will be when the sale can achieve a profit for taxpayers.

They can't have it both ways - either self-regulate and go bust as a result of their risky business practices, or allow the government to restrain irresponsible lending and accept the government safety net.

An example of where politicians interfering in lending comes at the height of the Credit Crunch. The penny had actually dropped for most lenders. The wholesale markets froze up. Multi billion pound losses were being seen. The economy was inevitably going to fall in to recession.

The logical thing for any bank to do was to tighten up its lending and do it fast. Conserve capital or fail.

What did Darling and the other politicians expect them to do? Lend even more.

The total incompetence on all sides of the triangle at each step will never cease to amaze.

But don't pin the failure of RBS and HBOS on poor quality UK mortgage lending. It may not have been perfect, but it isn't why those bailouts were needed.

green1970 wrote: »

What matters is that you can afford the mortgage repayments. Every car I've ever had a loan for has usually been worth less than the loan I took out the minute I drove it off the forecourt. Houses, in the main, are a bit more stable than that so why make it harder to get on the ladder - it really doesn't matter if there's a high loan to value for those first few years if the repayments are truly affordable.

Somebody with little or no equity in a property is far less likely to pay their mortgage than somebody who has got their own money to lose if they walk away. This isn't about making it harder to get on the ladder. It's just the simple reality that those who have a personal stake tied up in a property will prioritise their finances to pay the mortgage before the Sky, booze, fags and mobile phone contracts.

green1970

I can see where you're coming from but my opinion is that people do their damnedest to keep the roof over their heads, regardless of the equity situation. I'm in negative equity and I'd live on beans on toast for a year, get second jobs, etc, sooner than walk away from my home.

jamesd

People may try hard to keep a roof over their heads but it's simple fact that lending at higher LTV is associated with higher default rates. That's part of why loans at higher LTV are more expensive, to cover the cost of those who default. If you haven't see the figures for this, take a look at the FSA's Mortgage market Review document which has some illustrations and data to show the effect.

Interest only has a higher default rate than low LTV standard mortgages but if I remember correctly lower than the high LTV ones. That's perhaps because lenders take more care over interest only lending.

Thrugelmir

opinions4u wrote: »

The likes of HBOS and RBS, biggest bailout "beneficiaries" failed for factors that were nothing to do with UK residential mortgage lending.

HBOS like NR ignored basic risk management policies in the pursuit of growth of mortgage lending. Lloyds has a major task in shrinking the acquired mortgage book. With a high dependency on wholesale funding for the forseeable future.

jamesd

A bit more on income multiples, called Loan to Income in FSA terminology. Here's what the Mortgage Market Review had to say about it on page A3:18 (150): "Loan-to-Income (LTI) is not a good predictor of default. We found no compelling evidence to suggest that arrears and possessions increase consistently as the level of LTI increases. This is because LTI is a proportional coefficient that does not take the level of expenditure into account. Household expenditure does not increase in the same pace as the level of income."

So if the idea is to regulate to what people can afford, forget income multiples.