Mortgage Madness Buyers Tempted With Loans

[Guest Charlie The Tramp]

The banks give lessons in how to commit financial suicide

From The Mail

Banks are tearing up the rules limiting the amounts homebuyers can borrow and encouraging them to take on enormous mortgages. A young working couple without children and on an average wage can now borrow close to £245k-80% more than in the past. The figure amounts to a staggering 5.41 times their joint gross income of £45,248.The change to home loan rules means that almost all homeowners will be able to borrow more.

But critics have warned the deals could encourage borrowers to take on dangerous levels of debt.

Banks and Building Societies are offering the mega-mortgages as they battle for business in a cooling market.

The FSA has argued that a maximum home loan of three times a single person`s salary and twice a couples joint income is prudent

Instead lenders are switching to an affordability test in which most buyers will qualify for much bigger loans after an assessment of their income, debts and spending patterns.

The shift flies in the face of warnings from the City watchdog, the FSA and the BoE.

A&L Director of Mortgages, Stephen Leonard said: Affordability provides a more responsible approach

[Guest Bart of Darkness]

But critics have warned the deals could encourage borrowers to take on dangerous levels of debt.

For "could" read "will definitely".

[libitina]

For "could" read "will definitely".

Or 'have already'.

[IP Newcomer]

So what explains this?

• Is the article plain wrong?
  
• Are we wrong, in that house prices are not overvalued?
  
• Are the banks simply unaware of the likelihood of a house price fall?
  
• Are the banks aware, but covered by cheap insurance?
  
• Have the banks passed on the risks to buyers of debt?
  

What is happening here? What does Dr Bubb think?

[BuyingBear]

So what explains this?

• Are the banks aware, but covered by cheap insurance?

• Have the banks passed on the risks to buyers of debt?

Yes, it's bundled up and securitized and passed on, the debt is effectively sliced up and bundled into different risk levels and combined with other loans at the same level, Refco were good at trading these notional levels of risk.

The banks can create the money out of no where thanks to fractional reserve banking, borrow from the BoE or markets, pocket the carry trade and insurance against the risks of default, that's why Lloyds cares little about the quality of their debt, the risks outweigh the rewards and the liabilites are passed on.

On the flip side pension funds are compelled by regulators to hold bonds, because interest rates and gilts yield very little institutions have chased higher risk securities in search of a yield, which has driven those yields down to a level unbefitting of the risks, you can expect a 'flight to quality', it only takes one major bankruptcy or default to scare the birds.

Edited October 15, 2005 by BuyingBear