Thursday, 19 June 2008

A Brief History Of Irresponsible Mortgage Lending

To give some approximate dates and actions all according to memory now

1998 Standard Life Bank introduced lending based on affordability meaning that salary multiples were no longer 2.5 joint income but between 2 times and 4 times joint income. Income confirmed by payslips, employer reference or accountant reference.

1998 - 2001 ish most other lenders start to lend on affordability. This has the effect of starting to push house prices above their mean price.

Interest rates are cut after 9/11 meaning that lenders lending on affordability will lend more. So the affordability model gives multipliers from 2.5 times to 6 times income.

house prices continue to rise

2001 ish to speed up the processing lenders introduce fast track where no income verification is needed. Mortgage rates on Self cert are brought more in to line with prime rates and lenders stop requiring bank statements to prove income declared.

2001 - 2007 As house prices continue to push up further and further above their mean, borrowers start to inflate their income (no proof is now needed on fast track) with or without help from their brokers. The LIAR LOAN is born.

2003 - Government abandons RPI (that includes housing costs) in favour of CPI (that doesn't...) as official measure of inflation, thus causing interest rates to become artificially low and helping to fuel the biggest house price bubble in history.

2006/2007 Almost every one of 80 new mortgage enquiries I have I tell the client that on their salary they cannot buy the place they want and the client says that they thought they did not have to declare their salary anymore for a self cert mortgage. 'WRONG you have to declare your earnings - you cannot lie'

2007 Northern Rock e-mail me to confirm that they guarantee they will not check the income of my clients if the LTV is less than 75%

Lenders continue to lend on affordability with the same multiples as in 2001 even though mortgage rates are now double.

summer 2007 northern rock goes bust. Lenders realise they are in trouble.

June 2008 lenders still lending well over 2.5 joint income, but now mostly with full income verification on fast track and increasing rates on self cert to create some risk premium for the lender.

Mortgage lending collapses and house prices start the long downwards spiral.

Next - a 30% drop in the housing market leaves only crazy dogs trying to inflate their salary to buy.

2010 new legislation introduced by a Conservative government requiring the FSA to actually do some of the things a regulator is supposed to do, like make sure lenders are lending in a responsible way.

Which leaves us with
LIAR LOANS - an applicant has lied on the application about income or occupancy (residential loan with property let)
SUB PRIME - an applicant has had a previous credit black mark
SELF CERT - a mortgage where the income is stated but not checked
FAST TRACK - a mortgage where the salary/net profit is stated but not checked
AT RISK - a mortgage of >95% LTV or higher multipliers than 2.5 joint income or no repayment vehicle or ends after retirement.

4 comments:

Martin Cole said...

So based on the loans arranged by yourself over the past few years what percentage fall into the following categories in total?

LIAR LOANS - an applicant has lied on the application about income or occupancy (residential loan with property let)
SUB PRIME - an applicant has had a previous credit black mark
SELF CERT - a mortgage where the income is stated but not checked
FAST TRACK - a mortgage where the salary/net profit is stated but not checked
AT RISK - a mortgage of >95% LTV or higher multipliers than 2.5 joint income or no repayment vehicle or ends after retirement.

CROWN said...

None
None
None
most mortgages were fast track
>95% none
higher than 2.5 joint - a couple for high earners.
no repayment vehicle - none
ends after ret - none

and that is why I have hardy arranged any mortgages over the last 4 years.

Martin Cole said...

Thanks. I have been trying to take on board the implications of some of your postings to this blog. It appears to me as a complete outsider that what has been running is a monstous scam entirely dependent on ever rising property prices and in Northern Rock's case an actual notification to mortgage arrangers of the type of loans upon which no income checks would be performed.

Surely the Bank of England or the FSA must have been aware of these practises. We outsiders could not comprehend how the ridiculous boom was sustained for so long, but now it is clear it was straightforward fraud by the lending industry, at least that is the conclusion I have to draw.

Thanks for your detailed response.

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