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Don't Let The Lenders Have Another Go At The Mortgage Punchbowl

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Julian Knight: Don't let the lenders have another go at the mortgage punchbowl

Sunday, 7 November 2010

The average age of a first-time buyer is now 37. Think about that for a minute – 37 – an age by which a generation ago the norm would have been to have had your own home for well over a decade, and, probably, to have even finished having a family.

In just the past 10 years, the average age of a first-time buyer has risen by nearly seven years, such has been the racing away of house prices from normal incomes. You'd have thought this would have been tempered by the relative decline in prices since the credit crunch, but the tightening of income multiples has had a similar effect on the prospects of would-be first-timers as a massive escalation in prices.

Think of it this way: If three years ago you could get a 95 per cent mortgage but now can only get a 75 per cent mortgage, then, in effect, you have seen a 20 per cent rise in prices. At the same time, savings accounts pay nothing – so how do you get to the magic 25 per cent deposit? The much-vaunted bank of mum and dad has helped some, but there are only a limited number of families that are able – or willing – to find 30 or 40 grand to give to their children.

As Steve Morgan, the chairman of house-building giant Redrow, put it last week: "For generations, 95 per cent mortgages have been the norm. Indeed, the vast majority of existing home owners started out buying their first homes with a mortgage of this size. Yet the current generation of first-time buyers are being denied the opportunity."

Mr Morgan is over-egging it a bit, there are mortgages where a smaller than 25 per cent deposit is required, but it's just that there are not many of them, and they come at a premium. Nevertheless, it is frustrating that the lenders, having acted so irresponsibly up until the crunch, have now swung around so completely the other way. Somewhere between the two extremes is ideal.

But Mr Morgan went on to warn that the Financial Services Authority's plans to reform the mortgage market will actually make all this worse. The FSA's centrepiece proposals are the tightening-up of interest-only mortgages and affordability criteria. Mr Morgan accuses the FSA of giving medicine which will "kill the patient", and of "deliberately suppressing mortgage demand". In effect, taking the punchbowl away, not when the party is in full swing, but before the guests have arrived. And Mr Morgan is far from a lone voice. It's part of a concerted campaign by lenders, mortgage intermediaries and now the house builders to get the FSA to row back on mortgage reform.

The Council of Mortgage Lenders (CML) issued a dire warning last week that 45 per cent of current home loans wouldn't pass muster under the FSA rules. Recently I met with the head of lending at one of the UK's biggest mortgage providers and he too banged the anti-FSA drum, suggesting that instead of restricting product areas and income multiples it ought to oversee lender balance sheets and restrict capital should the lender start "doing a Northern Rock", giving out silly loans with not much to back them.

I have just finished reading Andrew Ross Sorkin's excellent Too Big to Fail, about the US financial crisis. I was particularly struck by how quickly in a crisis, assets – mortgage loans in this instance – which once seemed valuable and to all logic have definite worth become, well, worthless. Firms and regulators – even the new, beefed-up Bank of England – and ratings agencies are pretty hopeless at the true pricing of assets. The maxim that something is only worth what someone will pay for it is truest here.

It is only through regulating at the sharp end of product generation that we can get any real idea what a mortgage company's book is worth when under stress. What's more, interest-only loans have been massively oversold in this country, I have always thought they were a rank, bad idea – if you can't afford to repay the capital loan you shouldn't be buying in the first place. The one possible exception on interest-only is buy to let, but here again, many have been given loans that really shouldn't have been. If those who oppose mortgage-market reform get their way then we will have the potential for yet another free for all. Now this may mean that in the short term firms such as Mr Morgan's will sell a few more homes, but long term we will just go back to square one.

The simple truth is that the market has to be saved from itself – Lord Turner's famous punchbowl analogy again. The main reason we have first-time buyers aged 37 is because of lending practices – too expansive up until 2007, too restrictive since. The answer is not to let rip again, or to trust the lenders. Instead let's have a framework as the FSA is proposing so that everyone knows what they can and can't do. Ultimately, this will help the price of houses settle according to supply and demand (which I reckon will mean lower prices in many parts of the UK after inflation) rather than lenders inflating through their beloved habit of "product innovation".

That's the way in the long term to better serve the interests of the disappointed generation who want to own a home but can't.

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