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Unfair punishment

One of the things you notice if you move to a small village, as I have done in the past few weeks, is how much of its social life centres on booze.

Skim through the local paper, as I do every Friday, and you cannot help wondering how it would manage to fill as many pages as it does, were it not for the endless stories about habitual drink- drivers caught behind the wheel and alcoholics battling each other at weekends outside every pub in the area.

Last week, England’s chief medical officer Sir Liam Donaldson recommended that, as part of a strategy to deal with the country’s growing drink problem, there should be a minimum price of 50p per unit of alcohol, adding about 50p to the £1 price tag for a can of strong alcohol, for example, or a bottle of wine would sell for a minimum of about £4.50.

According to Sir Liam, such a simple measure could lead to 3,393 fewer deaths a year, 97,900 fewer hospital admissions, 45,800 fewer crimes, 296,900 fewer sick days, 12,400 fewer people unemployed and benefit society by £1bn a year.

Gordon Brown, yet again displaying the political acumen for which he has become renowned in recent times, immediately nixed the idea. “I do not think it is fair that the majority of people who do not have a drink problem should be penalised for the actions of a minority,” the Prime Minister was reported as saying.

Two days later, new FSA chairman Lord Turner of Ecchinswell, chief government report writer and regulatory apologist, published a paper on banking supervision in which he discussed the possibility of introducing curbs on mortgage borrowers.

Lord Turner’s review of banking argued that there is a case for limiting the size of homeloans to protect people from borrowing too much. This might either be done by reducing the loan to value ratio on mortgages, restricting it to around 85 per cent, or by capping the amount available to borrowers to a maximum of three times their income.

In support of this argument, he pointed out that countries with proud regulatory traditions such as Hong Kong, Greece and Poland have formal restrictions on the size of homeloans.

On the other hand, his discussion paper recognised, some people would be kept out of the property market because they would not be able to raise enough money for a bigger deposit. Such a strategy might also lead to “cheating”, with borrowers getting round the restrictions by borrowing the extra money elsewhere, for instance, by using a credit card.

This is, of course, absolutely true. In fact, one of the recurring themes of surveys of first-time buyers at the height of the property boom some two years ago was the extent to which they were borrowing money from all sorts of sources, including credit cards, in order to find a deposit for a new purchase.

To me, however, what is even more important is the fact that in his eagerness to make the FSA look tough, Turner appears to have misunderstood what happened within the housing market in recent years.

Let me stress that I am not against the idea of tightly controlling the distribution of financial products or, sometimes, even banning them from sale altogether. There are times when a product can be so toxic that it does not deserve to be made available for public consumption.

But that is not what happened here. Yes, there are hundreds of thousands of people who are falling into arrears. Around 45,000 people lost their homes in 2008 and another 80,000 householders will do so this year.

The reality, however, is that many of those to whom it is happening were borrowers who either falsified incomes to obtain so-called self-certified mortgages or they took out some lenders’ wildly over-generous loans, such as Northern Rock’s 125 per cent mortgages. The minute an economic crisis struck, one not of their making it should be said, they were doomed.

These were often cases where any vaguely sane assessment of a prospective borrower would have told lenders that the person in front of them was a terribly bad risk.

Yet lenders failed to carry out the minimum checks needed to ensure that such people did not get the loans they were asking for.

The answer to the problem of bad debt is not to adopt a “one size fits all” lending solution but to use sophisticated credit scoring to weed out the minority of unsuitable or overoptimistic borrowers. Punishing millions of people with perfectly good credit histories and imposing blanket bans based on spurious income levels would be a terrible mistake.

But not such a terrible mistake that the FSA – fearful of yet another kicking from a vengeful public and an approval-seeking Prime Minister – is prepared to make it anyhow, forsaking its principles in the process.

When it comes to preventing the needless loss of thousands of lives a year, we must not “punish” the majority by charging them a few pence more for their booze. But when it comes to mortgages, it is OK to shut the stable door after the horse has bolted. Even if it is the wrong door.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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