It’s probably fair to say that pretty much everyone in the UK would prefer to avoid a repeat of the 2008 financial crisis. It’s also pretty much indisputable that rash lending, including rash mortgage lending, played a major role in leading to the financial crisis. It’s therefore entirely understandable that regulators, for which read the government, have stepped in to curtail over-enthusiastic lending practices. The question, however, is whether or not their actions have been proportionate or whether they’re actually doing more harm than good.
The collapse of Northern Rock and the rescue of Lloyds, RBS (and others)
While the collapse of Northern rock and the bailout of Lloyds and RBS made the headlines, there were plenty of other near misses in this period. Barclays came very close to needing a bailout but manage to avoid it. Halifax was taken over by Bank of Scotland to create HBoS, which was then taken over by Lloyds after getting into trouble. The Co-op Bank bought the struggling Britannia. Bradford & Bingley (B&B) was part-nationalized, part taken over by Santander, which also took over the old Alliance & Leicester. Nationwide took over the Cheshire Building Society, the Derbyshire Building Society and the Dunfermline Building Society. Looking into these cases, the same story emerges time and time again, rash lending and poor management. Seeing that the free market seemed to be doing a very poor job of managing itself effectively, the government sent in the regulators.
The Mortgage Market Review and the Prudential Regulation Authority
Both the Mortgage Market Review and the Prudential Regulation Authority acted to rein in the mortgage market. In particular they forced lenders to look beyond headline figures and dive into the details of applications to ensure that borrowers really could afford them over the long term. They also essentially forced lenders to demand larger deposits, with borrowers now expected to put down as much as 25% of the agreed value of the property. On the one hand, this does make sense from the perspective of wanting to protect banks both from the risk of falling house prices (although the nature of the UK housing market is such that this is a fairly small risk) and the risk of default on the part of the borrower. Realistically it makes it possible for the borrower to be able to sell the home for enough to pay off the mortgage and move on to another property, be that as a downsizer or a renter (or in a more affordable location). At the same time, however, it exacerbates what could be called, “the rental trap”.
The plight of first-time buyers
It can be hard to pay rent and find money for a deposit. The bigger the level of deposit you need, the harder it becomes. Initiatives like the Help to Buy ISA are meant to address this, but these bring their own controversies, like age limits and the question of whether or not it is reasonable to give taxpayer subsidies to home buyers at all. Allowing lenders to lend up to the value of the property (or at least rather closer to it), could be a simpler and arguably fairer way to assist first-time buyers of all ages.
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