CML news & views

On 17 March, Liberal Democrat shadow chancellor Vince Cable is due to address our second annual conference on responsible lending. Today, he offers a preview in CML News & Views of the message he will deliver to lenders.

Vince Cable last addressed a CML audience 15 months ago, when he spoke at our annual conference in December 2008. His speech then gave a balanced view of events at the height of the financial crisis, acknowledging that politicians had been making a series of conflicting and simplistic demands on lenders, and that populist pressure to “pass on” rate cuts was inappropriate.

At our forthcoming event, he will update the industry with his views on responsible lending, and on developments in mortgage and housing markets more widely.

We are publishing his article unedited today, but would like to address a couple of points he makes in it.

First, he predicts that a continuing rise in unemployment and further increases in interest rates will push many borrowers “over the edge.”

We believe that a combination of lender forbearance, low interest rates, lower than expected unemployment and a variety of government schemes has helped keep mortgage possessions in check, and will continue to do so.

Having originally forecast 75,000 possessions in 2009, our data showed that there were, in fact, 46,000 cases during the year. We have predicted 53,000 possessions in 2010 but have already said that, while we cannot be complacent about mortgage payment problems, our forecast looks a little pessimistic.

Our table compares what is happening today with the last market downturn. It shows that lenders and borrowers are managing difficulties more effectively in the current cycle, and that possessions are lower – even though there are now one million more mortgages than in the early 1990s.

Table One: Annual possessions

The second point made by Vince Cable that we would like to address is his assertion that there is a “serious negative equity problem.” In fact, house price increases in recent months have led to a decline in negative equity. In April 2009, we estimated that 900,000 home-owners were in negative equity but believe that is less than a year this total has declined to around 650,000. It is also important to understand that negative equity is not directly linked to mortgage payment problems, and that the overwhelming majority of borrowers pay their mortgage in full and on time every month, whether or not they are in negative equity.

Vince Cable writes:

“In a fortnight’s time, I shall be addressing the responsible lending conference and when I last spoke at a CML event in December 2008 the British economy was reeling badly having just suffered, in effect, a massive heart attack. At that stage, the prognosis looking forward was bleak, particularly for the housing market, and the required treatment needed to bring the patient back to health was expected to be harsh.

“With the British economy exiting recession, albeit very limply, last month and with figures for repossessions having not reached the levels that were forecast, there is a temptation to believe that the crisis has passed. But the subject of the upcoming conference, responsible lending, reminds us of one central factor in the collapse was the willingness of institutions, particularly in the UK and the USA, to advance mortgages to borrowers with questionable creditworthiness and on improbably generous terms, based on the popular belief that property prices would rise forever.

“Many borrowers are now struggling with mortgage arrears and, while there is currently some forbearance under government-assisted schemes, the continuing rise in unemployment and any future increases in interest rates will push many over the edge. A repossession crisis may have been postponed rather than averted. And, outside the south east, where a domestic property slump has largely been avoided, there is a serious negative equity problem.

“There appears, nonetheless, to be unmet demand for mortgages, currently being held at bay by lack of supply. This is a particular issue for those seeking to move house but, at the same time, some of the more aggressive banks, seeking to expand their market share, are relaxing their offerings in terms of loan-to-value ratios. 100% mortgages are still with us.

“Any eagerness to return to former lending practices should be a source of concern. For reasons that are not altogether clear, the housing market has not adjusted, at least yet, to realistic levels. Historical trends show a cyclical pattern of boom and bust, lasting roughly 15 to 20 years, going back to the mid 18th century. This time the ‘bust’ hasn’t happened, as it has in commercial property.

“The IMF, among others, has suggested that the market at its peak was around 30% overvalued. Correction on that scale has happened only in some provincial cities where blocks of newly constructed, unoccupied flats overhang the market. Opinion seems to be divided between those who believe that a temporary constriction of supply has created a brake on a long and probably deep fall in prices and those who believe that ‘this time it is different’ and are eager to pile back into the market.

“A revival of asset prices may help the banks’ beleaguered balance sheets but creates bigger obstacles to first-time buyers and those on modest incomes, and risks creating another artificial bubble which could burst with damaging consequences.

“How should a responsible regulator deal with the conflicting pressures on lending? The subject of the current FSA Mortgage Market Review. What is needed is to re-capture the old fashioned building society model of lending which was lost in the feeding frenzy after demutualisation: lending with care and treating borrowers with respect. The FSA is right to emphasise safety as with tighter verification procedures for self-certification (though some will be baffled as to why it requires new regulation to deal with what is, at present, criminal fraud). Affordability tests will make lenders responsible for properly assessing consumers’ ability to pay (banks will claim they do already). FSA rules will cover buy-to-let (or lie-to-bet, as it is now known).To me, these seem like sensible, but modest, consumer protection measures.

“But behind the technical details there are bigger issues. It is deeply damaging for a wealth-creating culture that housing isn’t just seen as a nest but a nest egg, a repository for the country’s savings and pensions. It isn’t sensible for families to run up large personal debts gambling on future house prices. Property speculation is not a productive industry. I suspect that a bad attack of amnesia is encouraging the idea that nothing needs to change.

“The big, practical issue, so far ducked, is whether the banks should be set tough, new, prescriptive, rules on loan-to-value ratios and multiples of income. There are inevitably many complexities. But it is easy to be blinded by the proliferation of products. Traditional mortgage lending operated on basic rules of thumb which made sense then and make sense today. The obvious basic principle of mortgage lending is not to lend more than the security available. This should be re-instated. What I would want the FSA to do is to introduce a traffic light system: a yellow light, a warning, for high risk mortgages of 90% or more requiring stringent checks; and a red light, a ban, for new mortgages (as opposed to remortgaging) of 100% or more, the lending which got us into this mess in the first place. That way, there is a clear signal that the wild excesses of the past will not return.”