The FSA should limit risky mortgages before a new housing bubble forms

Jun 03, 2011, 10:44

Merryn Somerset Webb

Posted byMerryn Somerset Webb

Share with
friends:

Comments (7)

I am bemused by this story in the FT. The FSA has been running a review of the mortgage market (the MMR) for sometime now. The idea is to try and prevent boom and bust being quite as painful as it has been this time around by limiting risky lending.

So far, all ideas of putting in place caps on loan to value ratios, banning interest-only mortgages, enforcing a maximum multiple of salary on loans and so on appear to have been rejected in favour of having the banks make proper checks on borrowers' incomes and on their spending patterns – these being the things that should show just what their ability to repay a loan is like.

It is all basic and reasonably sensible stuff – stuff you’d have thought a bank would be on top of anyway.

But, like all sensible stuff, it is also turning out to be controversial. This week the Financial Services Consumer Panel said that any changes should be delayed. Why? Because “there is a danger that lenders will reject mortgages that they view as not complying with the MMR and so further restrict consumers' options during a period of general lending restraint… To avert this danger, implementation of new affordability rules should be delayed until the housing market had demonstrably recovered.’”

Hmmmm. So the rules should be delayed so that banks aren’t discouraged from lending money to people who they think might not be able to afford to repay their loans at a time when it is increasingly clear that house prices are about to take another nasty tumble? That doesn’t seem quite right.

Surely, if everyone agrees that change is necessary, the consumer panel would be doing consumers more of a favour if they were urging the MMR to be brought forward? That way, its members would know that, even if the credit environment were to suddenly ease, no consumers were being allowed to take on more debt than they can cope with at a time when they are likely to make capital losses.

They’d also know that they had acted before a new bubble had been built rather than afterwards. Which would make a pleasant change.

Comments (7)

Published in Blog More articles by Merryn Somerset Webb

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Michael Lewis

    (03 June 2011, 12:18PM)  Complain about this comment

    From their perspective, they want to manage the decline - I think its everyones interest to see a good 20% decline in home prices - if spread over a couple of years.

    A complete bust ... not in their interests. One way to ensure that happens and people don't get their houses repossesed is to try and ensure that there is some liquidity in the housing market. If someone needs to sell they can do so in an orderly way.

    Banks, well aware that house prices may decline should (in theory) restrict lending anyway.

    Having a multiple of 3 times income seems perfectly reasonable though. No reason why that couldn't be brought in and enforced.

  • 2. Bob

    (03 June 2011, 01:07PM)  Complain about this comment

    Bottom line - there is no danger of a cap on mortgage multiples comin into force this Sumer, in 2011 or next year.

    It is just a lot of bluster with lots of vested interests reigned against any such attempt to better regulate the mortgage market.

    I am viewing several houses in the coming week and intend to offer 80% of asking on all - problem is, I know that others will offer more despite most being those waiting to sell their own home and myself being a cash buyer.

    Sellers don't look to whether someone needs a mortgage or whether they have cash - they just see the highest offer even if that highest offer has little chance of ever completing.

  • 3. Roberto Birquet

    (03 June 2011, 06:34PM)  Complain about this comment

    It is incredible is it not. A deregulated housing market has led us to disaster, so let's not reform it. Let's blow up a nother bubble to rescue us from the last one. And of course, too much debt is blamed by all sides, with differences of opinion being whther public sector debt is too high, private sector (for me the worst), or both.

    so let's encourgae more dbt, and make sure the next generation has to take on more, too. For what? To help the banks. We need to let them fail.

  • 4. Roberto Birquet

    (03 June 2011, 06:45PM)  Complain about this comment

    Michael
    A complete bust ... not in their interests.
    One way to ensure that happens and people don't get their houses repossesed is to try and ensure that there is some liquidity in the housing market.
    ----
    But that would just stretch the market fall out longer, or not allow the necessary fall to even happen.

    As you say another 20% woul;d be fine. If we must "support" the market, meaning holding up riices, do it from a reasonable level that does not create an over-indebted socity. for pity's sake.

    We need to let the market deflate or people will have no money left over to boost the rest of the economy. Why don't economists seem to undertand this?

  • 5. Elvis Presley

    (03 June 2011, 10:04PM)  Complain about this comment

    Keep feeding people into the ponzi scheme in order to hold up nominal house prices for the next few years and let inflation do its work. What a terrible, cynical fraud to impose on green FTBs. If they ever work it out there'll be the mother of all mis-selling scandals.

    Keep the alcoholic drunk for a while yet while we think of what to do with him, the DTs might kill him if we withhold the booze. If he deteriorates, get Dr Smirnoff.

  • 6. Mark Oliver H+H

    (04 June 2011, 04:09PM)  Complain about this comment

    I thnk we have already sealed our fate for another house price boom with three years of building 100,000 new homes per annum (and no expectation of an increase in the next few years) against household formation over over 300,000 per annum. Unfortunately that is bad news for economic growth as people cannot afford to live where the jobs are and if companies cannot get the skills then they will invest in other countries.

  • 7. Daytona

    (05 June 2011, 09:55AM)  Complain about this comment

    Isn't this about attempting to prevent the 20 million homeowning households from reducing consumption by switching from spending to repaying mortages, because consumption makes up 70% of GDP, rather than saving the annual 1 million house movers from themselves ?

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>