Some time in 1983, shortly after my 25th birthday, my partner and I bought our first home together. Obtaining the necessary 95 per cent mortgage meant putting on a suit and tie and facing a searching interview with an Abbey National branch manager.
For today’s 20 or 30-somethings, life on the house-buying front is infinitely more difficult. Quite apart from the fact that many are likely to be facing massive debts for years after leaving college, the current reality is that they will find it very hard to obtain a mortgage at a 95 per cent LTV – whether they wear a suit or not. Self-employed borrowers are also finding life difficult, as more checks are made on their income before loans are considered.
Even for those in steady well-paid jobs, most lenders are now offering the best deals only to those able to raise a minimum deposit of at least 20 per cent. Lending criteria have also been significantly tightened up.
Inevitably, like any changes driven by market vagaries, all these restrictions have a strong flavour of stable doors being shut after the horse has bolted. In turn, this raises that prospect that as the mortgage famine eases in the next five or six years, lenders will once again begin to apply very much the same criteria they did before the financial crisis engulfed the market back in 2008.
Lenders will deny this, of course, but anyone who experienced the property downturn of the early 1990s knows all too well that initial concerns about lending money to people who could not afford to pay had evaporated by the end of that decade ’ right until Northern Rock’s debacle managed to switch on one or two lightbulbs among credit-happy loan providers.
It is in that context that we ought to be looking at the FSA’s mortgage market review. We know that despite the relatively low level of repossessions currently taking place, millions of borrowers are standing at the edge of a precipice.
As the FSA’s review points out, almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income, while at the peak of the market over 30 per cent of all mortgages were interest-only.
It is true that an interest-only mortgage does not necessarily mean a borrower has no means to repay the capital. The Council of Mortgage Lenders’ research in 2006 found many borrowers with “lumpy incomes” prefer to make capital repayments on an as-and-when basis.
In other cases, there may be a repayment vehicle in place but if the lender does not identify it, the loan is reported as being on an interest-only basis with no evidence of an investment vehicle in place.
It can also be perfectly sensible for someone in a stable job with good promotion prospects to start with an interest-only loan and then graduate, as I did, to a repayment further down the line.
Again, however, there seems little doubt that too many consumers borrowed in the expectation that future house price rises would pay off their loans. Too many borrowers with credit-impaired histories slipped through the net.
Back in February 2009, the FSA hinted at limits on LTVs and lower-income multiples on loans. These more extreme ideas have since been abandoned in favour of generally sensible proposals for stricter affordability checks and restrictions on self-declared incomes. In addition, borrowers may have to provide information to help the lender understand their true income and outgoings.
The aim is to prevent a repeat of the abuses we all know about in the mid-Noughties. The scores of mortgage brokers who have been disciplined for abuses are proof positive that in many cases they were complicit in these cons.
It is in that context that, in my opinion, housing minister Grant Shapps’ contribution to the mortgage debate must be viewed. He apparently told the National Housebuilding Council lunch last week: “I think it was at the moment that I realised I wouldn’t have a mortgage if the MMR changes went through that I thought this might be going a step too far.”
I am not clear what he means by this. My best guess is that, having raised a finger in the air to test how the wind is blowing on the FSA’s proposals, Shapps is indulging in hyperbole, spouting off on a subject he does not understand in order to curry favour with housebuilders and lenders.
Nothing wrong with spouting off and hyperbole, of course, as many “friends” who read this column will happily point out, I am the worst sinner of the lot in this regard. The difference is that, unlike Shapps, I am neither a housing minister nor tipped for higher Government office. He had better hope we do not experience a repeat of the recent lending bubble at some future stage because if we do, some of us will remember who is partly to blame for it.
Nic Cicutti can be contacted at firstname.lastname@example.org