The good old days are often seen, in hindsight, to have been anything but good. However, in the light of the present disastrous scene in the mortgage lending market and the not-so-far distant endowment selling scandal, it is hard for those of us with long enough memories to recall the halcyon days before Mrs Thatcher’s “Big Bang” as being anything but good.
For a start, the building societies, reined in by legislation, were unable to lend more than their own funds permitted. Post-Big Bang came the Gadarene rush to turn themselves into banks and drench the borrowing public with money raised on the wholesale market.
With supply now exceeding demand, it led, in the natural way of such things, to much reckless and slapdash practice. There could have been no such rash lending before that time. Pre-Big Bang, with limited stock to work with, only the best-quality business was sought.
To make matters worse, in contrast to the days when a 95 per cent valuation mortgage was about the best you could generally hope for, we now see 125 per cent being touted. Did these foolhardy nincompoops learn nothing from the last bout of negative equity?
When I was a lad, endowment mortgages were granted, more or less, as favours. They were a luxury product. I have taken many a client to a building society manager to be interviewed as to their suitability for having an endowment mortgage. In the days before that treacherous product that is the low-cost endowment was invented, the client was assured of having his mortgage repaid by a fully funded policy and all the bonus accrued to him.
Even when the early low-cost version came on the scene, it was based on a cautious amount of future bonus being discounted. Not like the later version, where low, medium or high-growth rates are assumed, set within parameters suggested by the FSA – a thoroughly blame-free and wise body ensconced in an ivory tower in the East End which is able to move the goalposts by magic and is therefore always right. Unless you look at things in hindsight, when you will find that it has been pretty well always disastrously wrong.
But I digress. Back to endowment mortgages.
It was almost impossible for a properly funded endowment mortgage to cost, per month, less than a repayment, unlike a low-cost one, where, by setting the assumed rate of growth as high as possible, you can produce a projected monthly cost of less than a repayment.
So, when the Big Bang floodgates opened, and the whiff of commission was carried on the wind, we saw bank and building society managers not dispensing endowment mortgages to a chosen, well-heeled few, but urged, and sometimes threatened, by their masters in head office to flog more of them to anyone, highly geared of course, with unlikely rates of growth, but still within the recommendations of the FSA. This would have been seen as horrendous practice when commission was a dirty word for a bank manager to utter, only a year or so before. The seeds of the endowment misselling scandal had been sown.
Of course, you can’t flog your endowment unless you can provide the mortgage loan at the same time. So we saw the traditional three times income become higher and ever more alluring to trap the unwary until now it is typically five times income. Wives or partners’ incomes can now be taken into account, where before it was only so for women over 40 years of age or engaged in a professional occupation. And 30 years ago, I cannot recall ever encountering what is surely the height of imprudence on the part of a lender – the selfcertified mortgage.
Nor can the life offices escape criticism. They were happy to issue their policies at unrealistic rates of assumed growth. And the conditions under which these were employed became ‘dumbed down’, as with so many other things in modern life. In collusion with this, of course, were the lenders. Often proper care for the innocent borrower, once paramount, became ignored.
No longer were policies formally assigned to the lender. Saves all that fiddle-faddling about, not to mention expense, you see. Now, policies are just issued to the borrower, plus a copy, and he is left to his own devices as to what to do with it.
I remember finding two identical copies of a £110,000 Legal & General endowment in the biscuit tin of a client who had asked me to sort out his financial affairs. He was puzzled. He wasn’t paying any premiums for them. Never had done as far as he recalled. When I told him that in effect he was several years in arrears with his mortgage, he was dumbstruck. The lenders were not worried. They didn’t even know about it.
No longer did the life office undertake to inform the lender if premiums fell into arrears. So no longer did the lender have any control over such matters. Not that they cared. They were getting the interest OK, let’s argue about the capital in 25 years’ time.
And other safeguards that have also vanished into insurance history. In the past the life office undertook to ensure that the surrender value of the policy would never be less than the amount by which the mortgage would have been reduced if it had been on a repayment basis. Therefore, no shortfalls were possible in those days – hence no complaints either. That storm had yet to come.
In addition, the non-forfeiture clauses were deleted. And monthly premiums were “true” and not “instalments” of an annual premium.
The sad thing is that even the most highly respected of the life offices and lenders were by now managed by lads in red braces producing huge volumes of poor-quality business when they ought to have displayed a more mature foresight of disaster.
As for the regulators, it makes you wonder what they are really for? It surely cannot just be to boss us about with finicky rules. After all, an out-of-kilter situation like that at Northern Rock does not arise overnight. Did no one in E14 notice the clouds gathering?
Sorry, Maggie, but you have a lot to answer for, too.