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Those who do not learn from history…

July 18th, 2009 · Posted by Skuds in Life · No Comments · Life

The West Sussex County Times carries a column in its property porn section which is sponsored (and written) by a local mortgage company.  Sometimes I look at it, although normally I don’t.  This week I did and was left slack-jawed by the end of it.I thought that there was a sort of general consensus that one of the factors which contributed to the current econimon problems was the whole housing and mortgage situation, where banks were lending too much to people who couldn’t afford to pay, were lending too much compared to the value of houses, that property prices were too high, and so on.  This is why we have had banks limiting loans to 85% of the value of property and not lending more than three or four times income.

The financial services industry generally thought that the various controls and regulations that turned out to be too light and ineffectual were in fact too strict, and the Tories agreed with them.  You might have thought that everybody had learnt their lesson, but not according to Dale Jannels of AToM Ltd.  He starts by saying:

Nationwide launched a 125% mortgage this week!  Sadly, most reports failed to spot that this scheme is for existing borrowers, in negative equity, looking to move house!  Positive news, but the hype will have teased first time buyers who will have to wait a while longer yet!  In the middle of 2007 there were some 28,000 first time buyer products.  Today there are roughly 1,200.

Is it just me who feels a bit depressed at the suggestion that there is a pent-up demand for people to get their foot on the first rung of the property ladder by borrowing more than their house is worth?   Why is it “positive news” that banks are ready to start getting back into the bad habits that landed us in our current mess – even before the current mess is cleared up?    If these prospective buyers have such short memories, shouldn’t somebody be doing something to save them from themselves before they borrow more they can afford – when interest rates are so low that the only way they can do is up?

Later on there is this scientific-sounding statement on lending:

However, it is borrowers moving from lender to lender which helps to stimulate money movement in the financial markets.  Borrowers leaving a lender release funds for someone else, and so on.

Not sure I follow that.  If an existing borrower moves from one lender to another they will free up funds with their old lender – but use up funds with the new one.  There is no new business; just a bit of a merry-go-round that ultimately just benefits those on a commission to help keep it going round. (Like AToM Ltd?)

But the real  scene-stealer was at the end:

Finally, re-mortgage applications have increased recently.  Borrowers looking to secure long-term fixed rates are applying at the right time.  Some, who are in increasing financial difficulties, are looking for sensible ways to remortgage (not always our recommendation).  Others are releasing equity to acquire Buy to Let properties in the current cheaper climate.

Wasn’t it only a few months ago that the papers were full of stories of buy-to-let landlords coming undone, when they discovered that there really is no such thing as a free lunch?   If you have a house with some equity in it you are secure.  Use that equity as a deposit on a second house, then borrow the rest and you are not secure.  When your fixed rate deal ends and you are suddenly faced with mortgage payments doubling what are you going to do?  Double the rents so that nobody can afford them?

And then what will you do? Blame the government? Blame the banks? Or blame yourself for being greedy?

Suddenly it becomes clear how the whole housing and mortgage market got into their spirals in the first place – it appears that we are all rushing, lemming-like, to make sure we are as close to the edge as possible.

Let’s get some proper regulation in this business while we still can.  If the Tories get into government then, for some reason, I can’t see them putting in any sort of regulation – they thought there was too much to start with – so we should be doing something nw while we still can.  Prospective first-time buyers will be better served by a drop in house prices than by an increased willingness or ability to lend them what they can’t afford.   Preventing irresponsible lending should go hand-in-hand with building more affordable homes suitable for first-time buyers rather than more four-bedroomed houses.

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