News Review: Specialist Prime
High LTV doesn’t have to mean high risk by Charles
Haresnape, managing director, Aldermore Residential Mortgages
The government is clearly spooked at the prospect of another credit bubble de- veloping and is prepared do anything within its power to prevent a repeat of the events that gave rise to the recent credit crunch. Chancellor George Os- bourne has said the Finan- cial Services Bill will give the Bank of England’s Financial Policy Committee the power to curb high loan-to-valua- tion lending, if it believes a credit bubble is starting to develop. The Chancellor confirmed that the job of the FPC “is not just to try to moderate a credit boom but to alleviate a credit bust”. If needs be, it will be able to restrict maxi- mum LTVs to 75%.
Surprise surprise The Chancellor’s comments were made as the Financial Services Bill received its sec- ond reading in Parliament. The FPC will report on its proposed powers in March this year and its powers will then come into legal force in January 2013. It’s perhaps no surprise that the government has the jitters at the very thought of another credit boom and bust and I’m sure most of us would prefer to see a steady and stable mortgage mar- ket, rather than endure the roller-coaster ride of just a few years ago. But is banning
high LTVs necessary the best way to control lending, or is it too blunt an instrument that could result in undesir- able and unintended conse- quences? There is no doubt that a close correlation exists between high LTVs and a greater propensity for bor- rowers to default on their loan payments. That’s an indisputable fact. However, it’s also a fact that the main reason for high mortgage ar- rears is not high LTV lending within itself, but a sudden loss of income resulting from unemployment,
reduced
working hours or marital break-up. Even in the 1990s when a significant number of borrowers found themselves with negative equity, it was a loss of income that triggered at least 70% of possessions. Which stands to reason.
Borrowers with higher levels of equity will probably also have cash reserves they can fall-back on in an emergency, whereas borrowers with little or no equity are more likely to have little or no spare cash. However, saying that high
LTV lending is irresponsible is wrong. It’s the combina- tion of high LTVs, an inse- cure or vulnerable income stream and a lack of any other financial resources which gives rise to potential problems. Its a bit like saying all
youths between the ages of 17 and 21 should be banned from driving because that age group accounts for the overwhelming majority of ac- cidents. It isn’t age by itself that creates the problem, it’s a lack of experience. If every- one learnt to drive when they
14 MORTGAGE INTRODUCER MARCH 2012
Protecting against risk: a safety net helps
were 25 the majority of ac- cidents would undoubtedly be in the 25-30 age group. There are safe drivers under the age of 21, just as there are responsible borrowers with little equity.
Lifeblood The challenge, therefore, is to be able to identify those high LTV borrowers who represent a good risk, rather than simply banning all high LTV lending. To do so would have dire consequences for both the mortgage and housing markets. First-time buyers are the lifeblood of the market and if they are excluded the whole market suffers. Clearly,
something
has to be done but a blanket ban on high LTV loans is not the answer. The fact that many first- time buyers are already pay- ing rents higher than equiv- alent mortgage payments, demonstrates that affordabil- ity is not a primary issue. In fact, mortgages are more af- fordable now than they have been for many years and all lenders have stringent af- fordability checks in place to ensure borrowers are able to repay their debts when rates
rise again in the future. One solution to the prob- lem is to provide borrowers with a financial safety-net if they do fall on hard times and a parental guarantee is an effective way to do this. For example, Aldermore’s
Family Guarantee Mortgage doesn’t require parents to fork-out their hard-earned cash up-front, but if their offspring does hit hard times, parental support is available which avoids arrears. But these are just two ex- amples of what is already be- ing be done now. There are undoubtedly other potential products and it’s incumbent on lenders to develop prac- tical solutions to this very pressing problem as soon as possible. I would like to see the UKs largest lenders put their considerable resources behind this issue,
rather
than leaving it to smaller and newer entrants to do all the running. Imposing a blanket ban is rarely the right solution. Government, regulators and lenders need to work togeth- er to ensure those who need mortgages, such as first-time buyers, have access to them - albeit on a responsible basis.
www.mortgageintroducer.com
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