Borrowers face the squeeze

David Smith: Home Economics

How big a threat to the housing market is the proposed clampdown on mortgage lending by the Financial Services Authority (FSA)?  And is there a bigger immediate problem?  Nobody thinks that irresponsible lending should be allowed to continue, and it would help if lenders know their customers better.  Thought we never really had 125% mortgages, even from Northern Rock, anything approximating to a 100%-plus mortgage should be discouraged.

Looking at the “table of shame” in last week’s FSA mortgage market review though, I am not sure how irresponsible lenders were.  It includes the striking statistic that 49.3% of mortgages handed out in 2007 (the market peak) were given without proof of income.  Yet not all of these were self-certified mortgages, wrongly disparaged as “liar loans”.

The other figures in the table suggest that the FSA may be overdoing the “irresponsibility” bit.  Fewer than a third of mortgages were interest-only, fewer than 14% were on a loan-to-value basis of more than 90%, and fewer than 4% were genuinely sub-prime – loans to people with impaired credit histories.

Regulators, by their nature, tend to lock the stable door when the horse has bolted.  To the extent that lenders were irresponsible, and I don’t dispute that some were, things will change.  The new guidelines will make it harder for some buyers to get mortgages, particularly the self-employed.  But nothing will change before the second half of 2010, so the deserving self-employed should make loan arrangements now.  In the long run they will be squeezed.

The new guidelines will take the edge off the housing market in the long term.  In the short term, there is another danger, identified by David Adams, head of residential at Chesterton Humberts estate agency, following Rightmove’s report that asking prices rose 2.8% in the past month.  “This is an agency-induced increase that is not sustainable,” he says.  “There is a huge stock shortage in much of the country, and agents desperate for instructions are giving unrealistic quotes to prospective sellers.”  He is right.  The best way to kill off the market is if prices rise too rapidly. (David Smith, The Sunday Times)

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