Irresponsible lending

pvt

Anthorn wrote: »

Here's an alternative viewpoint.

Let's consider the stock market crash of 1929: From 1926 to 1929 the American stock market rose almost 400% fuelled by loans to investors to buy stocks. The loans were so large that they could not possibly be repaid if the stocks could not be sold at a profit. The worst happened and the market crashed!

Let's consider the 2008 banking crisis: That started because people were being loaned large amounts of money to buy homes mostly for resale which they could not possibly pay back if they could not sell those homes for a profit. The bubble burst and the banks went bust!

Does anyone see a pattern here?

Let's look through these forums and see how many threads we can find where people have been given huge credit limits they could not possibly pay back if they used the whole of that credit facility. Some of them used that credit facility and ended up defaulting!

On the basis of the above I'd say that no-one can deny that there is irresponsible lending! I can remember a time back in the hire purchase days when the ability to pay was calculated as a third of disposable income. Sadly, those days are now gone!

The analogy is pretty lame Anthorn. The primary purpose those people took out mortages in 2008 was to buy a home to live in. In most cases they had every intention of paying the mortgage. They may have been a little imprudent taking out such high LTVs, but it was hardly wreckless.

Whereas In 1928 investors were gambling with their money in belief that stock markets always go up, and thus fuelling an illusion of false value and false growth.

Fiddlestick

buz12 wrote: »

Haha, I didn't post for a fight, I wanted honest opinions. Which you kindly offered. We all need bringing down to earth from time to time.

When I look back on the dark days of debt I do feel like I was just being dragged further in, but you guys are right. I didn't have to spend it and there is no one else to blame.

I'll leave the past behind me

Thanks again for your comments

Post of the year. :T

Anthorn

pvt wrote: »

The analogy is pretty lame Anthorn. The primary purpose those people took out mortages in 2008 was to buy a home to live in. In most cases they had every intention of paying the mortgage. They may have been a little imprudent taking out such high LTVs, but it was hardly wreckless.

Whereas In 1928 investors were gambling with their money in belief that stock markets always go up, and thus fuelling an illusion of false value and false growth.

Your information about the 2008 banking crisis is wrong: It started in America where the property bubble was created and maintained through bank loans to people who bought property for resale. That caused comentators at the time to draw a comparison with the 1929 Wall Street crash which is exactly the comparison I made.

It may well be true that in the U.K. people took out mortgages for homes to live in but not at the source of the crisis from where it spread throughout the world. But if those U.K. mortgages had been for an amount that borrowers could pay back the impact on the banks would not have been so great!

In any case the existence of widespread irresponsible lending is proved or even proven!

Anthorn

callum9999 wrote: »

That's a rather simplistic view of the issue. You don't remotely need to sell the house at a profit to pay off a mortgage. Yes, it's bad for you personally if you can't, but it shouldn't stop you from paying it all back - mortgage payments take the place of rent payments after all, and most people can make rent payments despite getting nothing tangible in return (obviously they get use of the house - I mean something they now own).

If a house is being bought for resale then it must be sold at a higher price than the purchase price in order to meet the original loan plus the interest, fees, taxes, etc.

Even for a house bought to live in, like shares on the stock market we hopefully buy at a lower price and eventually have an asset that is worth more than we paid for it.

The term used if we buy high and sell low is negative equity and that's what happens when a property bubble bursts and prices start to decline.

jamesd

Except that in the United States most states have "protection" against irresponsible lending: if there is negative equity the borrower gets to walk away from the property free and clear of the debt. The owner of the mortgage gets the loss, not the person who bought the property. So when negative equity started to arrive the mortgage owners started to see big losses. In the UK the borrower remains liable for the negative equity even after the sale. This means that in teh UK there is an incentive to stay in the property while in the US there is an incentive to leave. That makes the US system less stable. That "protection" for consumers is a major part of the cause of what caused so much pain for consumers.

In the US most mortgage lenders don't continue to own the loans, they sell them on, taking their profit when they do the initial sale. With no liability to the buyer they had an incentive not to care about the quality of their lending and lent to some who could not afford to repay credibly or who had unstable finances. These people then compounded the problem as they defaulted and left the new owners of the mortgage with a loss.

This carried over to the UK in the form of a drying up of the money markets for medium and short term lending. For lenders like Northern Rock who had financed their mortgage lending with borrowings of three to five year terms this prevented them from refinancing those loans. So as they came due their cash balances fell until they lost all liquidity and needed a rescue even though their loan books were not particularly bad.

The Northern Rock situation was made worse by the terms of the FSCS at the time, which gave people an incentive to withdraw money because if they didn't they would still suffer a significant loss of money. The current one guarantees 100% up to the limit, eliminating that incentive to have a run on the bank.

Lending so that repayments are more than a third of income isn't necessarily a bad thing. It depends on what else the borrower is spending money on and their income. A non-extravagant borrower with relatively high income can easily handle more than fifty while a low income one may not be able to handle more than ten percent. Those with higher incomes tend to have more disposable income and more flexibility in their finances so can sustain higher housing spend percentages and income multiples than those closer to the bread line, if they choose to do that rather than other spending or more saving.

zerog

pvt wrote: »

The analogy is pretty lame Anthorn. The primary purpose those people took out mortages in 2008 was to buy a home to live in. In most cases they had every intention of paying the mortgage.

I disagree, especially when you say 2008. This might have been true in the 80s and 90s, but by time time of the crash, people were claiming that the primary purpose was to buy a home, but in reality they expected the prices to keep rising and rising allowing them to trade up and take on even higher mortgages.

If that isn't true, then why was everyone (except people who bought near to 2008) devastated in 2009 when prices didn't really fall that much? If they were buying a home, then price changes shouldn't matter unless they were greedy !!!!!!s looking to borrow irresponsibly through remortaging. Especially given that buying would still have worked out cheaper than renting.

It doesn't help that anyone who features in the Daily Mail is introduced by the value of his house.

jamesd wrote: »

With no liability to the buyer they had an incentive not to care about the quality of their lending and lent to some who could not afford to repay credibly or who had unstable finances. These people then compounded the problem as they defaulted and left the new owners of the mortgage with a loss.

Surely the main fault lies with the banks who bought the mortgages? I mean people who couldn't afford to repay were part of the problem, but I can't blame them as a group for wanting to buy a house. I have no sympathy for a company which tries to make money off other people's misery though.

pvt

jamesd wrote: »

The Northern Rock situation was made worse by the terms of the FSCS at the time, which gave people an incentive to withdraw money because if they didn't they would still suffer a significant loss of money. The current one guarantees 100% up to the limit, eliminating that incentive to have a run on the bank.

What you've written is correct, however I don't think that even 100% protection would have stopped the run on NR that ultimately killed it. Many of the people queuing down the high streets to pull all their savings out had far less than the FSCS limit deposited with NR, but were still panicked into withdrawing their cash. The simple fact was that people didn't understand the situation, and that wasn't helped by a lack of guidance or reassurance from the government.

pvt

zerog wrote: »

I disagree, especially when you say 2008. This might have been true in the 80s and 90s, but by time time of the crash, people were claiming that the primary purpose was to buy a home, but in reality they expected the prices to keep rising and rising allowing them to trade up and take on even higher mortgages.

If that isn't true, then why was everyone (except people who bought near to 2008) devastated in 2009 when prices didn't really fall that much? If they were buying a home, then price changes shouldn't matter unless they were greedy !!!!!!s looking to borrow irresponsibly through remortaging. Especially given that buying would still have worked out cheaper than renting.

It doesn't help that anyone who features in the Daily Mail is introduced by the value of his house.



Surely the main fault lies with the banks who bought the mortgages? I mean people who couldn't afford to repay were part of the problem, but I can't blame them as a group for wanting to buy a house. I have no sympathy for a company which tries to make money off other people's misery though.

I didn't say people aren't greedy, or that they didn't expect the value of their homes to keep rising. Who would not want the value of their house to increase, and thus their equity in it to increase disproportionately as well?

I said the primary purpose most peopole bought houses was to live in them - and I think that is correct. I suspect very few (other than BTLs) were buying just as a speculative investment.

Maddogjones

It's a double edged sword. Banks are just as much to blame.

I does seem to me that some banks try to lead you astray and encourage you to over spend. My bank used to send me letters offering credit cards and over drafts or personal loans. It got to the point I changed my telephone number as I'd get calls as late as 10pm offering the same.

Its a damned if you do and damned if you don't situation. If you borrow and it goes wrong you get a crap credit rating and if you're like me that has never bothered with credit cards or loans or over drafts, even at University I never had an O.D.. they worry you by saying you'll have crap credit rating because you don't have cards/loans and O.D's and this will affect you should you require a mortgage.

You would think good money management would be a plus. But it isn't. Years ago my bank manager told me I was a poor customer because they never made any money out of me.

sorry, went off topic there..

antrobus

jamesd wrote: »

Except that in the United States most states have "protection" against irresponsible lending: if there is negative equity the borrower gets to walk away from the property free and clear of the debt. The owner of the mortgage gets the loss, not the person who bought the property. So when negative equity started to arrive the mortgage owners started to see big losses. In the UK the borrower remains liable for the negative equity even after the sale. This means that in teh UK there is an incentive to stay in the property while in the US there is an incentive to leave. That makes the US system less stable. That "protection" for consumers is a major part of the cause of what caused so much pain for consumers.

That's not correct. Only 12 US states have non-recourse lending, and even in some of those states, it is possible for the borrower to be liable for some of the shortfall depending on circumstances. There are another half a dozen so-called 'single action states' which limit the ability of a lender to both repossess and sue for payment of a shortfall, but in the other 32 states recourse lending is the norm as it is here in the UK.

jamesd wrote: »

.....
This carried over to the UK in the form of a drying up of the money markets for medium and short term lending. For lenders like Northern Rock who had financed their mortgage lending with borrowings of three to five year terms this prevented them from refinancing those loans. So as they came due their cash balances fell until they lost all liquidity and needed a rescue even though their loan books were not particularly bad.

No, actually the NR loan book was decidedly iffy. So much so that NR was deliberately falsifying its arrears figures at the time.

jamesd wrote: »

.....
The Northern Rock situation was made worse by the terms of the FSCS at the time, which gave people an incentive to withdraw money because if they didn't they would still suffer a significant loss of money. The current one guarantees 100% up to the limit, eliminating that incentive to have a run on the bank.

Maybe, but the government plugged that particular gap very early on in September 2007. The actual run on the bank was only the matter of a few days, and mainly served to fill the pages of the newspapers. NR was still bust though.