The phrase "I don't believe it" is often used in the UK and usually shouted in a slightly posh Scottish accent, as per a much loved and serial luckless elderly sitcom character. My Scottish accent isn't very good but I did my best as I caught the BBC Breakfast broadcast on the morning of Monday 19th December 2011.
The cause of my outcry? The breaking news that the mortgage industry has had a long hard look at itself and decided that it needs to tighten up in a few areas where it might just have fallen short in recent years.
Show us your payslips
It's unbelievable, I know, but what they've come up with is a set of tough measures to ensure that home-owning wannabes can no longer pull the wool over their eyes. In a ground-breaking step it would appear that if you want to buy a property, not only will you have to prove your income, but those mean guys at the bank might even do some sums to see if there is any chance of you actually paying the loan back!
It's quite astonishing really, but no real surprise. The days when you could only realistically get a mortgage if you could afford to pay it back, disappeared at the same time as the experienced local bank manager was replaced with a zoology graduate, a credit scoring computer system, and a need to make enormous paper profits to ensure shareholder satisfaction and a fat bonus.
Houses of cards
It's difficult to know whether to laugh, cry or demand an investigation. The sheer announcement of these new measures is tantamount to a confession that due diligence didn't just take a back seat during those boom years in the financial services industry, it was on a bus heading in the opposite direction. In a vicious circle of their own making, these institutions caused the market to inflate, rewarded themselves enormously and then watched it collapse at the expense of the taxpayer.
Sub-prime lending has had its fair share of coverage in recent years but it does so back up the point that the very basics of lending haven't really changed, it's just the people doing the lending. In the old days, if someone had a poor credit rating it was usually for a reason, that reason being they had probably defaulted on a previous arrangement. These ratings were also a useful signal, flagging up those to avoid advancing more credit to.
Dress it up
Where it all went wrong is not rocket science. Someone, somewhere realised that anybody desperate for something will pay over the odds for it. High arrangement fees and exorbitant interest rates may have made the p&l account of the lender look good but all the time they were chipping away at the pockets of the borrower. Sustainable for a few years perhaps but it only needed the slightest tug on an income stream to see the file swiftly moved over to the repossession desk.
Regardless of what your stance is on banks throwing unfortunate mortgage customers out on the street, we all know it is a possible and likely outcome of default. Back in the boom days it also meant that lenders had a stock of property that increased in value and could be sold on to the next mug punter once the original defaulter had been charged exorbitant fees. Unfortunately however, when you multiply this scenario by millions, property prices start to head south and lenders are left with a portfolio worth less than half the price their dodgy lending criteria originally sanctioned.
Too little too late?
Still, with the world economy now in a shambles, it has at least caused the guys responsible for it to re-think their strategy when it comes to lending money to people who so obviously cannot pay it back. I wonder what's next on the agenda. Before you know it they might even start asking for identification before they let you launder money!
Sources:
BBC Breakfast - Broadcast on the BBC 1 channel on Monday 19th December 2011 06:00 - 09:15
