Thursday, July 15, 2010

Liar Loans: SFA from the FSA


You’ve heard of locking the stable door when the horse has bolted. Well, the Financial Services Authority, has gone one better and promised to do its job properly only after it's been closed down.  Yesterday, the boss of Britain’s financial watchdog, Lord Turner, grandly announced that the FSA was going to put an end to “liar loans”, 125% “suicide” mortgages and other scams from the great housing bubble.  Bit late your Lordship.    Last month, the Chancellor, George Osborne, announced that the FSA is to be scrapped and financial regulation returned to the Bank of England.

    Perhaps if the FSA had done its job six or seven years ago, we wouldn’t be in the state we are in now.  Ah, but that’s just being wise after the event isn’t it?”  It’s easy to criticise with 20/20 hindsight.  Wrong. As readers of this column will be aware, perhaps painfully so, I have been banging on about irresponsible mortgage lending for most of the last decade.  In 2004 I warned that house prices were an unsustainable bubble. In 2005 I fulminated against the irresponsibility of lending five or six times income.  IN 2006 I railed against Northern Rock’s “Together” mortgages where the bank loaned first time buyers 25% more than the value of their property, thus placing them in negative equity even before they got the keys.  After Northern Rock collapsed in 2007, to demonstrate what was happening,  I applied for and was offered a £200,000 mortgage after telling the broker I had a disposable income of only £18,000.  Sheer madness. 

  Now, I’m not a financial regulator, nor am I a banker or a treasury official.  If I could see that these practices were  ruinous, why couldn’t the people paid to regulate the mortgage industry?  I am genuinely mystified because these are intelligent people we’re talking about who really understand housing finance, as their latest report confirms.   So why didn’t they do their job? Or were they all watching internet porn like those employees of the American financial regulator the Securities and Exchange Commission exposed in April.

  The social cost of this regulatory failure is no joke.    In research published this week, the FSA reveals that no fewer than 46% of households in Britain (more in Scotland) either have no money left, or face a significant shortfall, once they’ve met their mortgage repayments and living costs.  That’s half the population!  Living on the edge, surviving day to day, racking up debts on credit cards, in constant fear of financial collapse.   And there’s more. The FSA paper - read it and weep -  reveals that half of new mortgages SINCE the 2007 crash have been taken out without the customer having to verify their income.  Yes, through the entire financial crisis, mortgage companies have continued to hand out liar loans to half of all mortgage purchasers.  This is financial irresponsibility on an epic scale. Surely it’s illegal to connive with customers in the falsification of mortgage applications.  What on earth has the FSA been doing for the last three years?
     
     It’s not as if anyone was in any doubt that self-certification mortgages were dangerous to financial health. .   They were our version of the American sub-prime mortgages that sparked the initial collapse of trust in banks in 2008.  The overselling of mortgages here and in America led directly to the credit crunch as banks realised that the securities, or bonds, sold on the basis of these dodgy mortgages were of questionable value.  Since all the banks held hundreds of billions of these Collateralised Debt Obligations, they stopped lending to each other. The government eventually stepped in and effectively bought up all the dud mortgages - and much else - through the Asset Protection Scheme. Liar loans don’t come cheap. The governor of the Bank of England, Mervyn King, said that the bail out of the financial system required £1 trillion of public money. 

  Still, you might wonder about the dog that didn’t bark following the bursting of the great mortgage bubble.  If so many homeowners have been sitting in houses they can’t afford,  why hasn’t there been a housing price crash?  Very good question.  House prices actually rose last year.  The reason lies in the hidden bail out of property owners. First of all, bank interest rates have been slashed to their lowest level in 300 years,  0.5%,  and kept there.  This has handed a windfall to all mortgage holders and especially owners of jumbo mortgages who save about £900 quid a month on a £500k mortgage. Tens of thousands of people with smaller mortgages are hanging on in homes they could not afford at normal rates of interest.

   The government also introduced various schemes to prevent banks repossessing homes, like the Homeowner Mortgage Support Scheme.  The state will basically pay the interest on your mortgage or let you take a two year “holiday”.  Well, why should the banks be the only ones to get a bail out?  This has kept repossessions low.  But the downside of these  humane policies is that they create large numbers of “zombie households” who face a reckoning down the line when the schemes are wound up and interest rates return to normal.

   There is also our old friend moral hazard.  First time buyers, in despair because they can’t afford to buy a house, are effectively subsidising house prices through their taxes.  The only ones who can afford to buy are those who are given tens of thousands by their parents.  This is not a sound and healthy market. If the FSA were being responsible it should advise those considering taking on a mortgage right now to think very carefully indeed.  Every mortgage sold in these extraordinary circumstances should carry a health warning: Interest rates WILL go up. 

  Of course, the real problem is the lack of housing both private and rented - an epic market failure which MPs did nothing to correct.  Not surprising since so many MPs were making a fortune out of speculating on the London property market.  Gordon Brown didn’t care because house price inflation delivered votes from people who saw the paper value of their houses going up and up.  But the cost was the deepest recession since 1946.    We will all be paying the price of Gordon Brown’s house price bubble for decades to come.  Let’s hope the Bank of England does better than the FSA at bursting the next one.

7 comments:

tris said...

At the risk of becoming a bore, I thought that was brilliant. Thanks.

Interest rates will have to go up. The low interest rates cause damage to the economics of the households of some elderly people who were depending on the interest on their savings to pay for the little extras, or the winter fuel bills, maybe a new winter coat or a wee break in the sun.

But once again, this is unlikely to be a cause of concern for cabinet members past or present.

Has no one told the Noble Lord that he's out of a job?

Gill said...

Great article - but one factual correction:

"the FSA reveals that no fewer than 46% of households in Britain (more in Scotland) either have no money left, or face a significant shortfall, once they’ve met their mortgage repayments and living costs. That’s half the population!"

This misrepresents the problem.

The FSA actually says that 46% of household *who took out a mortgage between 2005 and 2008* face a shortfall/no money left after mortgage payments.

That's a tragedy for them but you cannot extrapolate this to mean half the entire population has such a problem.

Otherwise, brilliant article - keep up the good work.

Cheers,
Gill

Anonymous said...

It should be remembered that the Party who first announced the "high house prices are the sign of a good economy" rubbish was the Tory Party.

Excellent article Iain, however, I really do think you need to shout louder. The media throughout the UK is monitoirng on a weekly basis the "recovery" of the house price market! They still don't get it or the fact that the pushing of house prices to beyond all reach of most people was what created this obscene mess in the first place. Let's hope their "recovery" never comes.
Jo

Anonymous said...

Liar loans are really tricky to deal with. I was talking with some Broker Dealer Lawyers and they agreed. Be careful where you get your loan and always ask for helpful advice.

Thanks!

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