A study by the Institute for Public Policy Research (IPPR) has recommended that strict limits be put on residential mortgage lending to avoid the boom and bust scenario that the country’s property market is currently experiencing. The paper is titled ‘The Madness of Mortgage Lenders: Housing Finance and the Financial Crisis’, and was written by Chris Hamnett, a professor at Kings College London. In it he argues that the current slump is being magnified by the massive growth that the mortgage market experienced before it, recommending that, in future, buyers should stump up at least a 5% deposit (25% for buy-to-let mortgages) whilst simultaneously being restricted to a multiple of 3.5 times their joint incomes. By doing this, banks would be able to place a ceiling on how potential borrowing can push up property prices.
Professor Hamnett argues that the rapid expansion of credit through tapping into wholesale money markets rather than retail funding through deposits set the market up for a more painful ‘bust’ than the one normally experienced after a prolonged period of growth. He also names and shames banks such as Northern Rock and Bradford & Bingley as being guilty of ‘grossly’ overvaluing property. He sees the current price falls as a ‘welcome necessity’ with the rapid rise in mortgage arrears and defaults highlighting the dangers of lending at over-generous mortgage multiples.
Whilst the report admits that the rapid expansion of the mortgage market allowed more people to get on the housing ladder, it states that this has come at a great cost to a lot of homebuyers who are now deeply indebted with negative equity affecting around 900,000 households (Council for Mortgage Lenders 2009). Many more face repossession and the treasury is having to foot the rescue bill via public finances. On summing up his vision for the future of mortgage lending, Professor Hamnett said: “There should be no return to the policies of the last few years, where the name of the game was to grow the share of the market and overall mortgage volumes by expanding into ever more marginal and risky market areas. The objectives for mortgage lenders should be responsible lending and risk minimisation.”
In reaction to the report, the National Association of Estate Agents (NAEA) said that whilst irresponsible lending needed to be discouraged, it was against wide-scale ‘sweeping measures’ that would exclude first-time buyers from the housing market. The chief executive of the NAEA, Peter Bolton King said that he doubted that most British homeowners would see the falling value of their homes as a ‘welcome necessity.’ Mr Bolton King also stated that the report ‘erred on the side of draconian.’
In summary, professor Hamnett is asking for the return of common sense in the mortgage market. It is common knowledge that an economy built on credit will not be a healthy economy for long. Although it is not the educated populace that make the decisions on financial policy, maybe the politicians would gain from listening to them rather than the greedy city boys whose only goal seems to be to make as much money as possible.