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Why Did Banks Relax Their Lending So Much?

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The modern property investor is a gambler by any other name.

In years gone by the banks would not have touched such people with a bargepole. What are the reasons for the laxity of lending policies at the moment? Why have banks chosen to risk money on these punters?

- Is it the sophistication of the modern financial system which allows mortgage debt to be packaged and sold to gullible investors? Is this a scam whereby banks make a killing issuing debt securities, then flogging them to investors (i.e. Joe Public), so they need not be concerned about the risk?

- Is it due to competitive forces in the banking industry?

- Is it due to inappropriate targets set in the banking sector - e.g. lending directors/managers/staff rewarded for lending more money?

Any other ideas?

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The Feel Good Factor? Optimism.

Inappropriate lending targets is a definate.

And I think some of them lost the plot and got up their own ....(highbrow and informative view, obviously)

Ambition. To have the monopoly.

All in MHO , of course.

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The Feel Good Factor? Optimism.

Inappropriate lending targets is a definate.

And I think some of them lost the plot and got up their own ....(highbrow and informative view, obviously)

Ambition. To have the monopoly.

All in MHO , of course.

Charlie the Tramp has some interesting thoughts on this topic.

Factors include: legislative loosening of credit markets and the emergence of aggressive US lenders into the UK marketplace.

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The modern property investor is a gambler by any other name.

In years gone by the banks would not have touched such people with a bargepole. What are the reasons for the laxity of lending policies at the moment? Why have banks chosen to risk money on these punters?

- Is it the sophistication of the modern financial system which allows mortgage debt to be packaged and sold to gullible investors? Is this a scam whereby banks make a killing issuing debt securities, then flogging them to investors (i.e. Joe Public), so they need not be concerned about the risk?

- Is it due to competitive forces in the banking industry?

- Is it due to inappropriate targets set in the banking sector - e.g. lending directors/managers/staff rewarded for lending more money?

Any other ideas?

Like sheep many got into massive debt and will spend the rest of their lives paying it back..

With low inflation lending has never had such a return.

The money lent is not diminishing in value...

and Interest rates make less difference to lent money in the long term then inflation..

If you borrow a huge amount of money now over 25 years and in a decade inflation has shrunk it.. It has cut into the banks profits.

It inflation is kept as low as possible the banks returns stay higher over the length of the loan.

Yup, low inflation would have helped the country had everyone not borrowed so much money.. It has helped the country now.. Providing you live at:

1 halifax street

Barclaysville

Lloyds Tsbshire

Buggeredbydebts

England

(see what I did there...:) funny? I thought so.. laugh.. giggle ha..)

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The Fed reduced rates to save the stockmarkets after the 2000 collapse, they figured the US consumer given cheap money would spend the economay out of a recession. Of course were the US goes the UK and the world usually follow. We used to take the pain and the resultant correction, suppose they thought "what the heck lets try something differant" :rolleyes:

Well thats a view alot of people subscribe to in the Markets.

Edited by Catch22

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The modern property investor is a gambler by any other name.

In years gone by the banks would not have touched such people with a bargepole. What are the reasons for the laxity of lending policies at the moment? Why have banks chosen to risk money on these punters?

- Is it the sophistication of the modern financial system which allows mortgage debt to be packaged and sold to gullible investors? Is this a scam whereby banks make a killing issuing debt securities, then flogging them to investors (i.e. Joe Public), so they need not be concerned about the risk?

- Is it due to competitive forces in the banking industry?

- Is it due to inappropriate targets set in the banking sector - e.g. lending directors/managers/staff rewarded for lending more money?

Any other ideas?

Your problem here is that you have the question the wrong way around. What you should be asking is 'Why was lending so restricted in the past?'.

1/ The banking industry in the UK was heavily regulated in the past. I don't have a detailed knowledge, but I understand banks didn't lend for housing, building societies did. Banks are now free to compete and have been for a while.

2/ More importantly, as I have posted a thousand times on this forum, housing laws in the past were too heavily in favour of the tenant. A bank caught lending to landlords, could find themselves stuck with a load of sitting tenants with more rights than the bank had when they went to reposses properties. You see for banks to WANT to lend on more than just OO properties, the bank HAS to be the number 1 in line when reposession time comes. So rather than risk becoming unwilling landlords to tenants who didn't pay market rents themselves (and who were protected by the courts, preventing the banks kicking them out), they just decided that they don't lend to private landlords. Now that laws are in favour of the lender and landlord, loans are plentiful.

This can easily be reversed by laws being changed, but for that you'll get an HPC, heavy anti government lobbying by banks and landlords, economic collapse as landlords and homeowners stop improving & repairing properties. In short, a return to the bad old days. People demanding accomodation from the council, unemployed everywhere you look, & socialists happy they stamped out landlords.

Edited by Time to raise the rents.

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Why did banks relax lending so much?

Because they were allowed to by government.

Why did governments allow this ?

Because they feared deflation.

Why did they fear deflation ?

See Japan

What happened in Japan?

What libertarian economists call Creative Destruction. (asset and wage deflation to you and me)

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Guest Charlie The Tramp

Your problem here is that you have the question the wrong way around. What you should be asking is 'Why was lending so restricted in the past?'.

The banking industry in the UK was heavily regulated in the past. I don't have a detailed knowledge, but I understand banks didn't lend for housing, building societies did. Banks are now free to compete and have been for a while.

I thought the Yanks were to blame for the present loose lending. :)

From the mid 1990s onwards American lenders flooded into the UK market."

"They stole a march on domestic lenders by using aggressive marketing techniques and more sophisticated credit scoring to enable them to undertake a looser lending policy. Crucially they had very deep pockets." Mr Rice said.

Seeing their market share vanish at an alarming rate, domestic lenders countered by making it much easier and quicker for people to get credit.

"In the 1980s you would buy a car using finance provided by the dealer, the decision on whether you had secured the loan would take a few days. Now with internet and telephone banking the process can take a few minutes and consumers shop around for the right rate," Mr Rice said.

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Your problem here is that you have the question the wrong way around. What you should be asking is 'Why was lending so restricted in the past?'.

1/ The banking industry in the UK was heavily regulated in the past. I don't have a detailed knowledge, but I understand banks didn't lend for housing, building societies did. Banks are now free to compete and have been for a while.

2/ More importantly, as I have posted a thousand times on this forum, housing laws in the past were too heavily in favour of the tenant. A bank caught lending to landlords, could find themselves stuck with a load of sitting tenants with more rights than the bank had when they went to reposses properties. You see for banks to WANT to lend on more than just OO properties, the bank HAS to be the number 1 in line when reposession time comes. So rather than risk becoming unwilling landlords to tenants who didn't pay market rents themselves (and who were protected by the courts, preventing the banks kicking them out), they just decided that they don't lend to private landlords. Now that laws are in favour of the lender and landlord, loans are plentiful.

This can easily be reversed by laws being changed, but for that you'll get an HPC, heavy anti government lobbying by banks and landlords, economic collapse as landlords and homeowners stop improving & repairing properties. In short, a return to the bad old days. People demanding accomodation from the council, unemployed everywhere you look, & socialists happy they stamped out landlords.

Who does the change in lending regulation serve?

Does it serve the citizens of this country? If not, why was it put in place by the government of this country?

The "old ways" you describe sound like the continental european model, which seems to function much better than the UK model. Availability of good quality housing at cheap prices is in the national interest - surely you wouldn't disagree with this?

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Why did banks relax lending so much?

Because they were allowed to by government.

Why did governments allow this ?

Because they feared deflation.

Why did they fear deflation ?

See Japan

What happened in Japan?

What libertarian economists call Creative Destruction. (asset and wage deflation to you and me)

Nice summary - do you have any links/evidence for this theory? Sounds very plausible to me.

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This can easily be reversed by laws being changed, but for that you'll get an HPC, heavy anti government lobbying by banks and landlords, economic collapse as landlords and homeowners stop improving & repairing properties. In short, a return to the bad old days. People demanding accomodation from the council, unemployed everywhere you look, & socialists happy they stamped out landlords.

Sounds great. Who do I vote for? :P

Seriously though, I think it's more to do with economic cycles. Lending must have been pretty lax in the 1920s for everyone to have built up so much debt. It was pretty tight in the 30s I would have thought. Equally it was tighter during the early 90s recession than it is now and if we have another recession you can guarentee it will be tighter than it is now.

I like your new avatar btw TTRTR, one for the bears and the bulls - (depending on which way you look at it) :)

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Is it the sophistication of the modern financial system which allows mortgage debt to be packaged and sold to gullible investors? Is this a scam whereby banks make a killing issuing debt securities, then flogging them to investors (i.e. Joe Public), so they need not be concerned about the risk?

Yes.

- Is it due to competitive forces in the banking industry?

Yes. In a fiercely competitive mortgage market, there is a "race to the bottom" in terms of credit quality; ie the mortgage lender who makes the riskiest loans to the least creditworthy borrower will get the biggest market share. As you say, they don't care about this as the debt is packaged up and sold on.

economic collapse as landlords and homeowners stop improving & repairing properties.

I doubt the economy will collapse if people stop painting their living rooms a hideous shade of red. :rolleyes: You over-estimate the primacy of fence-painting and gutter-fixing to the UK economy.

Edited by IPOD

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Charlie is right in that the impetuous for lax credit came from the US, (this report is from a Senate Committee). How far loose credit will go towards seeing off the impact of globalisation on the west is another matter. But the Americans won the cold war and the prize was global capitalism (no bad thing in my opinion) What our governments failed to tell us was that there would be errr ‘side effects’ mainly for the west.

Basel II

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You see for banks to WANT to lend on more than just OO properties, the bank HAS to be the number 1 in line when reposession time comes. So rather than risk becoming unwilling landlords to tenants who didn't pay market rents themselves (and who were protected by the courts, preventing the banks kicking them out), they just decided that they don't lend to private landlords. Now that laws are in favour of the lender and landlord, loans are plentiful.

I Agree. The banks have a lot more power now and can reposess more simply, which reduces their risk.

However, it is still the landlord/investor that takes on most of the risk, since the Bank can always foreclose.

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Who does the change in lending regulation serve?

Does it serve the citizens of this country? If not, why was it put in place by the government of this country?

The "old ways" you describe sound like the continental european model, which seems to function much better than the UK model. Availability of good quality housing at cheap prices is in the national interest - surely you wouldn't disagree with this?

The change serves us all. People weren't investing in the renewal of the UK to the same degree in the past because there was nothing to be had from renewing things. Councils let estates run down, society seperated into haves & have nots. There were the haves, living in their own homes & spending to renew if they could afford it. There were the have nots, renting & often living in squalid conditions because the rental market was so tight landlords didn't have to renew their properties to keep them occupied.

Many of you won't agree with me, but in the current society of near full employment, I believe anyone can get on in life, they just have to choose to. Things have therefore changed in the UK in an incredibly positive way, many of the old devides are disappearing. At least now if you rent, you can get a decent and affordable place amoungst normal people. Jobs are plentiful as people are actively working towards a better future.

What continental model anyway? The German one, they're failing & suffering for it. The French one? Where they tax you to death & give the money away to less deserving farmers & social misfits? If you ask me, it seems the continent has been learning from the U.S. & UK.

I Agree. The banks have a lot more power now and can reposess more simply, which reduces their risk.

However, it is still the landlord/investor that takes on most of the risk, since the Bank can always foreclose.

Yes and it was the landlord who had the most risk in the past as well. But ultimately the bulk of the money comes from banks, and if they feel there is any unnecessary risk, they just won't join the party, full stop.

This booming market has for a large part been a recovery from crazy laws, not a boom simply for a booms sake.

Edited by Time to raise the rents.

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But ultimately the bulk of the money comes from banks, and if they feel there is any unnecessary risk, they just won't join the party, full stop.

This is an interesting point and makes you wonder why so many banks have been burned in past recessions.

The truth is, all investors whether private or institutional can get swept along.

Take the asset manager who can elect to hold either Microsoft or a little known stock called Acme Software. He might think that Acme Software is seriously undervalued and will make his fund a big return when the market wakes up to its potential.

But he doesn't buy Acme. Why? Because all his other fund manager buddies hold Microsoft. Everyone knows that story. If Microsoft goes t!ts up, everyone will blame Bulmer and Gates, not the Fund Manager. If Acme Software hits the skids, the stupid Fund Manager tw@t who held the stock is for the high jump.

Edited by Flash

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I thought the Yanks were to blame for the present loose lending. :)

Come on CTT you will remember the timeline better than me. But we had the same scenario regards "buying" market share by using bigger borrowing multipules. Remember when the banks got burnt with bad debts in the overseas markets. So they deceided to lick their wounds and break into the UK domestic housing market mortgage industry. They " bought" market share by using bigger borrowing multipules, than the Building Society's . Who in turn seeing their market domination disappearing before their eyes resorted to the same multipules.

I also remember around 1982 or their abouts an insurance broker trying to sell me an endowment mortgage but without success. I didn't like having to rely on the market preforming at the time my mortgage was due for settlement. The insurance industry knew they were snookered, then they came up with the brilliant idea to make estate agents, banks and building society's their agents, paying them to sell their products...............the rest is history.

Incidently I had a friend who had/has his own Estate Agency, and he said he made more money selling an endowment mortgage than he did on the selling fee.

Edited by Catch22

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The change serves us all. People weren't investing in the renewal of the UK to the same degree in the past because there was nothing to be had from renewing things. Councils let estates run down, society seperated into haves & have nots. There were the haves, living in their own homes & spending to renew if they could afford it. There were the have nots, renting & often living in squalid conditions because the rental market was so tight landlords didn't have to renew their properties to keep them occupied.

Many of you won't agree with me, but in the current society of near full employment, I believe anyone can get on in life, they just have to choose to. Things have therefore changed in the UK in an incredibly positive way, many of the old devides are disappearing. At least now if you rent, you can get a decent and affordable place amoungst normal people. Jobs are plentiful as people are actively working towards a better future.

What continental model anyway? The German one, they're failing & suffering for it. The French one? Where they tax you to death & give the money away to less deserving farmers & social misfits? If you ask me, it seems the continent has been learning from the U.S. & UK.

Yes and it was the landlord who had the most risk in the past as well. But ultimately the bulk of the money comes from banks, and if they feel there is any unnecessary risk, they just won't join the party, full stop.

This booming market has for a large part been a recovery from crazy laws, not a boom simply for a booms sake.

All sounds very rosey, however the gap between rich and poor is widening in this country according to the stats so I'm not sure about this great equality speech.

I know you weren't in the UK before the 90s but believe it or not most council flats were pretty nice, especially in London, many were in the kind of house you now let. Most were kept in very good condition and the rent was very reasonable compared to private lets today. It's only the run down estates that remain now, the nice places were bought and sold for a fraction of their market value.

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Who does the change in lending regulation serve?

Does it serve the citizens of this country? If not, why was it put in place by the government of this country?

IMHO the deregulation of lending was the prime cause of the boom in the UK.

The Tories deregulated lending because

(1) their Thatcherite ideology was "deregulation = good"

(2) the city had great influence over them

(3) boom and bust creates great financial opportunities for the upper classes

Labour failed to bring back the regulations because:

(1) they thought that they needed the support of the city to stay in power

(2) their ideology had moved closer to Thatcher's

(3) they were too stupid to realize that deregulation was the cause of boom and bust.

(4) they preferred to say that it was the Tories' manipulation of monetary policy to influence elections that was the cause of boom and bust (therefore independence of the BoE was the answer).

(5) they believed their own hype

frugalista

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Duplex is spot on in his analysis IMHO. Kinda anecdotal but here goes...guy meets the Sales Director of one of the largest US players in the lending industry, inside 10 minutes the Sales Director has agreed to lend speculatively considerable millions to experiment with a new mortgage product exclusively for ftbs..guy walks away shaking head thinking "Did I just imagine that or has that guy just agreed to back me with X millions?" Same guy gets bigger backing of major UK bank..again shakes head..not sure whether to celebrate, he thinks "it`s as easy to borrow X millions as 10K these days".

Whatever we say the securitised and structured market is regarded as win-win if you do enough volume. There`ll be a Nick Leeson style failure that`ll emerge, but through fractional reserve these Banks have made trillions "So what a proportion end up as junk, there`ll be a hedge fund somewhere that`ll buy it"

:huh:

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NZ's central bank, desperate to turn off the credit tap, switches from inflation targeting to credit clampdowns targeting houseprices to try to stop the banks lending - and the further destruction of the real economy.

http://www.nzherald.co.nz/section/12/story...jectID=10354683

Your problem here is that you have the question the wrong way around. What you should be asking is 'Why was lending so restricted in the past?'.

1/ The banking industry in the UK was heavily regulated in the past. I don't have a detailed knowledge, but I understand banks didn't lend for housing, building societies did. Banks are now free to compete and have been for a while.

2/ More importantly, as I have posted a thousand times on this forum, housing laws in the past were too heavily in favour of the tenant. A bank caught lending to landlords, could find themselves stuck with a load of sitting tenants with more rights than the bank had when they went to reposses properties. You see for banks to WANT to lend on more than just OO properties, the bank HAS to be the number 1 in line when reposession time comes. So rather than risk becoming unwilling landlords to tenants who didn't pay market rents themselves (and who were protected by the courts, preventing the banks kicking them out), they just decided that they don't lend to private landlords. Now that laws are in favour of the lender and landlord, loans are plentiful.

This can easily be reversed by laws being changed, but for that you'll get an HPC, heavy anti government lobbying by banks and landlords, economic collapse as landlords and homeowners stop improving & repairing properties. In short, a return to the bad old days. People demanding accomodation from the council, unemployed everywhere you look, & socialists happy they stamped out landlords.

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when the mortgage war was at its peak about 4 years ago the biggest lender the Halifax had to slash nearly a whole percentage point off its mortgage rate to stop its business crumbling away.............

At the time their market share was plummetting........and they've haven't been able to claw back the margin ever since....Prior to this boom mortgagees were paying through the nose through their own inertia..

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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