Tuesday, March 24, 2009

Horse, stable door, bolted....

A number of stories coming out of the UK regarding the mortgage market and potential regulation of maximum LTV’s and multiples of income.
In terms of the LTV’s clearly the notion of 100% or more is crazy. It’s shocking that Northern Rock continued to lend 120% mortgages even after they had been bailed out. These loans now make up a large proportion of the banks defaults, and it’s really not surprising. If prices fall 20% then there’s 40% of negative equity in the property. Here you are Mr Rock, have our keys back, we’ll go rent somewhere for half the price until the dust settles.
Offering loans to valuation in Spain has caused a big problem in the past, as it was often open to manipulation and left people with cash in their pockets and all fees paid. In fact, it was possible with larger properties that people walked away with hundreds of thousands of euros in their back pockets and little or no incentive to pay the banks back. Now it has gone back the other way too far, and banks are limiting the lending to the lower of price and valuation. This would be OK if they were still offering 80%. At 80% plus the mortgage expenses and purchasing fees, the customer is still having to fund 30% or more from their own pocket, even if this was an equity release from the UK. So a significant input from the purchaser which they wouldn’t want to lose under normal circumstances.
When it comes to affordability, they seem to be missing the point entirely. Allegations are flying around about the fact that some lenders have offered mortgages at 5,6,7 or more, times the household income. They seem to ignore the impact of interest rates on the affordability of people, and the monthly cost of the mortgages. If rates are relatively low and stable, then 6 times income may well be comfortable for many people, particularly if their other outgoings are not too high. The Spanish model, generally used, is better but not perfect. All finance outgoings not to exceed more than about 35% of net monthly income. Of course, this still can’t allow for future changes in interest rates. Of course, everything is dependent on past events when it comes to lending, as nobody knows what the future holds – there are several hundred thousand people in the UK that are now unemployed and have seen a significant drop in income, that they would not have expected a year or two ago, plenty of these in seemingly “safe” banking jobs. The percentage model, used in Spain, discriminates against those with higher incomes, as people with plenty of net disposable income will often find themselves unable to borrow in Spain, because they may have car loans and mortgages etc that take them close to or over the 35% already. So, what is the answer for “safe” levels of borrowing and lending? It seems to be something of a conundrum when you have lenders that are in a competitive market, and borrowers that are demanding more and a housing market that has relied on the next person being able to get a bigger mortgage as each home increases in value. Of course, many people that have been granted mortgages, have subsequently been able to load up on credit after they have bought their properties, for home improvements and furniture for the new pad. So, if the lender would look at their client’s credit report 6 months down the line, it may be that they would not choose to give the funding at this time.
Perhaps a way forward would be for borrowers to be more “tied” to one lender. I don’t think it would be possibly in terms of regulation, but consider the scenario if your mortgage lender could veto any other loan or credit applications before you were allowed to take them out? Or if you were only allowed by law to borrow from the same lender that holds your mortgage – so your current account and overdraft, mortgage, cards and personal loans are all part of one flexible funding package ? A nightmare for competition law, but it would make it harder to borrow from every credit card provider going – I mean, did MBNA ever turn anybody down ?
Common sense around the world would seem to be the way forward, but how do you regulate things when mortgages in the US were handed out to anyone that could sign their names, and the same mortgages became “investments” that bankers around the world could buy and earn themselves fat bonuses? Banks should basically be operating in a perfect market, in it’s simplest form being the concept of borrowing (at interest) from savers or from central or wholesale banks, and then lending at a higher rate to people that want to borrow. The bank earns a margin on the difference which they use to pay their overheads, which leaves a profit. Simple and understandable. Problem is, when you add greedy motivated and error prone humans into the mix! Send us a mortgage enquiry from our main site.

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