Stability hope in mortgage loan cuts
Mar 19 2009 by Anna Blackaby, Birmingham Post
Potential restrictions on mortgage lending arising from a report by the City watchdog later this year could provide a stable West Midland property market – provided they were done in a flexible and measured way.
That was the view of the Royal Institution of Chartered Surveyors spokesman for the West Midlands, Richard Franklin, following the wide-ranging review yesterday by the Financial Services Authority (FSA) which promised a host of more aggressive financial regulations.
Among other proposals on the oversight of banks and hedge funds, Lord Turner said the organisation planned to publish a paper this year assessing arguments for and against regulating the mortgage market.
This regulation could include imposing a cap on the maximum amount lenders could advance in relation to a property’s value or as a multiple of the homeowner’s salary.
The FSA said the rapid expansion of mortgage lending in the UK was a key factor in triggering the financial crisis, with the high loan-to-value ratios (LTVs) and loan-to-income ratios (LTIs) advanced playing an important role in the problems.
Mr Franklin said that initiatives to restrict LTVs and LTIs had worked well in providing a stable housing market in other countries, who had avoided the boom and bust the UK property market had had in recent years.
He said: “Where these schemes have been implemented the effect is to stabilise the market over the long term. Hong Kong introduced restrictions on LTV and LTIs and it avoided the crunch in the South East Asian market between 1998 and 2002.”
But he warned against a “draconian” approach to introducing the measures, saying they should be implemented in a gradual way and with a degree of flexibility to reflect a mortgage applicant’s financial and personal circumstances. Any scheme would also have to take into account the potential negative effects on first-time buyers, Mr Franklin said.
“The more stringent the timescale, the more dramatic the effects would be,” he said. “And, certainly for people starting off on their housing career, an LTI which is too draconian would have a major impact on first-time buyers.
“Any scheme would need to take account of individual circumstances – for example, if somebody had got a dowry or an inheritance, or the different circumstances of a couple with no children compared to a couple with half a dozen.
“It also needs to be balanced with the way financial institutions are funded and making sure they have got enough capital to loan.”
The FSA said the proportion of products allowing people to borrow more than 100 per cent of their home’s value, meaning people were technically in negative equity from day one, nearly doubled between 2005 and 2007, rising from 3.9 per cent to 7.4 per cent.
The riskiness of these high-LTV mortgages also increased during this period, as rapidly rising house prices raised the probability of a subsequent price collapse.
