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To lend or not to lend – is that the question?

I am tempted to wonder if we’ll need a Minister for Mortgages alongside the Minister for the City if the “stakes in banks” plan actually has to be implemented. Heavyweight HSBC and the safer than houses Santander can probably do it on their own. But others will almost certainly need to call on the Government.

Given the fact there will be a great deal of Government influence and actually direct power over some banks, what sort of lending criteria would a Minister for mortgages want to see?

We can already tell that the market will have four or five mega lenders. We have to hope that there will be a place for smaller lenders as well to keep the big boys honest.

Abbey, aka the Spanish, safe and stable Santander is taking a little bit extra margin on its tracker mortgages, for new customers at least. Let’s hope they don’t make a habit of it.

But setting aside the current skirmishes about products and even briefly the continued meltdown, what, I wonder, would the Minister for Mortgages like to see lenders lend?

Now I am not discussing mortgage backed securities – the sort of geared rubbish, with useless insurance, and a useless rating attached and very poor loans at the sharp end. The banks, and certainly the investment banks were indulging in a game of toxic pass the parcel with at least one big global insurer at the party as well.

But I don’t think it should mean that securitisation is dead. It needs to come back but it needs to be properly rated. Then it can do what it always should have done – provide flexibility to lenders in their funding models. It is a good idea that simply needs regulating.

The media and some commentators also need to consider what exactly they are calling toxic or slightly less hysterically “very risky loans”.

Not everything say that Bradford & Bingley lent out was duff and even those loans that are underperforming so to speak are not toxic. They are not very good for either lender or borrower but in themselves they can hopefully be managed.

In fact, although Money Marketing has been harsh in its criticism of the converted building societies, there is a danger that we are condemning with hindsight.

Damn them for the bonus culture certainly. But take a lender like HBOS – were the Crosby and Hornby years really so misguided about the strategy? Could they really have foreseen the complete breakdown in interbank trust?

Anyway back to the question for our mythical minister and his or her view.

I don’t think I’m being very bold for example when I predict that no minister, not even a free wheeling, free market libertarian would ever want to see the Together mortgage at 125 per cent loan to value back again. That applies whether it was intended for the young lawyers and doctors it was theoretically sold to or the ordinary folk who actually took it out – if some of the repossession horror stories are true.

But what about 90 per cent and 95 per cent? What about the different types of product? Buy-to-let has had a media kicking too but the big landlords in the sector may prove resilient even with the lack of remortgaging. That would be some good news amidst the flood of bad stories.

Is self certification finished and the rest of sub prime finished with this banking crisis? Sub-prime was arguably oversupplied and underpriced. There may be such a thing as too much competition.

But I can still see a need for society to have these sorts of products if it is a home owning society we want. What does our made up Minister think? Is there something inherently wrong with sub-prime loans that actually help repair credit ratings? The pool of borrowers is certainly going to get bigger in the next few years.
And if our minister wants a smaller supply of mortgages – that surely means contenancing a massive societal change with more people living at home longer or grouping together. It might even cut the divorce rate at the fringes. Will there also be less people buying houses in their lives as a result? We also have to consider the massive debt overhang that the university system now places on graduates and if the Chancellor of Oxford University Chris Patten gets his way on tuition fees this may get even worse.

There are several ways Government and regulators can approach the issue. Capital requirements probably do have to change but if they are too restrictive or too onerous then it will put the brakes on a lending recovery. At the other end, although I can’t help feeling rather less effectively, the FSA could get far more restrictive in what it allows brokers and mortgage IFAs to do. The ombudsman may also do some damage too depending on how it assesses what must be a growing number of mortgage complaints. Of course, it was never a broker’s responsibility to worry about how stable a lender was. You don’t really have to care too much if you are borrowing and not investing. It also strikes me as unrealistic for brokers to have worried that a deal, while not too good to be true, might have been too good to replace in a declining market.

Before Government action though, our Minister should also remember that there is now less distribution, there are less lenders, the former biggest lender is sure to be run more conservatively and shareholders, remember them, will be subjecting lending policies to unprecedented scrutiny. That is quite a lot of dampening for the market already.

Perhaps the minister should define irresponsible in lending terms? Helping the housing market splutter back into life would need a good supply of mortgages. So is that the goal or not? What exactly are we reconstructing? What market do we want to see? What is excessive? To lend, yes, but how much to lend. Maybe that is the question.


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