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Practise what we preach

HBOS is preparing for a £4bn rights issue only a month after declaring that it had no liquidity problems. It will also apparently be one of the biggest participants in the Bank of England’s £50bn scheme exchanging mortgages for bonds.

Of all the events brought about by the so-called credit crunch including the Northern Rock’s demise, the situation surrounding HBOS gives me greatest concern.

Everyone seems to be calling it the credit crunch but perhaps we should consider it to be a re-establishment of the fundamental principles of lending. My assertion is that over the last four years, lending institutions have been cavalier, if not reckless, in the loans that they have allowed, driven by ever increasing competition in the marketplace. Surely, it is unwise to authorise a 25-year loan against funds that you have only secured for three to six months?

Of course, hindsight is never wrong and I admit that I pass judgement with the benefit of this perfect prediction tool. However, there have been concerns for some time over lending practices such as big income multiples, minimal deposits, self-certification for employed people with only one source of income, some sub-prime lending and buy-to-regret, sorry I mean let, sub-prime mortgages.

There were some cases of borrowers who had clearly demonstrated in the past that they were unable to meet their obligations. They may have had CCJs outstanding, were in arrears with a mortgage or had defaulted on loans or credit cards.

I am not saying these people should never be allowed a mortgage but that the practice of some lenders to advance these people a mortgage without any period in which they had been able to prove that they could service their obligation was reckless. At least the credit crunch will curtail this kind of lending.

This situation really could not continue. At some point, as we all know, markets adjust and economic situations change. As we are all fond of saying, prices may fall as well as rise and past performance is no guarantee of future performance. These words of wisdom do not seem to have been applied to the housing market or to those lenders whose practices have been fundamental in fuelling a housing boom.

My belief is that big house price rises have been driven largely by the availability of credit. The adjustment that we are now seeing is natural. It had to occur and therefore while I am nervous about the prospect of declining house prices, I know fundamentally that these things need to happen in a healthy market.

The problem is that when this crisis is finished and lending principles have been re-established, lessons will not be learned. In four or five years time, we will see the same practices starting to be reintroduced in the market. That is the way of markets.

HBOS is in no danger of running out of money in the way Northern Rock did but if the UK’s biggest mortgage lender is having liquidity problems, who is next?

It seems that this credit crunch still has some months to run. The banks seem to be incredibly slow about declaring their positions and I believe it is time for the Bank of England, the FSA and the Government to encourage banks to declare their positions to end this period of uncertainty.

John Winful is a partner at Winful Associates


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