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The Next Sub-Prime Mortgage Crisis - We Have Learnt Nothing

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Some lessons are never learned and the boom and bust of the housing market is one of them. As we finish one housing crash we are already setting ourselves up for the next one. The seeds for the next sub-prime mortgage crisis have already been sown.

It stems from a desire by all parties to encourage people to buy their own homes and keep house prices going up. This results in an unsustainable boom followed by a sharp correction, all to the detriment of stability and economic growth.

Everyone from the building companies, estate agents, mortgage brokers, banks, government, owners and even buyers all want to see the market rise. Prior to the crash we had mortgages being offered for 120% of a home's value. We now have offers encouraging people to buy houses which are equally or more dangerous.

The reality of the situation is that house buyers (particularly first time buyers) are not earning enough to get onto the housing ladder at the moment. There simply isn't the demand.

Desperate to sell the houses on their books, Estate agents and builders have been offering shared equity solutions to first time buyers. The buyer only buys a percentage of the property (making it more affordable and much easier for them to get a mortgage). They then pay rent to the building company on the percentage they do not own. The scheme is all over housing websites. The government has been encouraging this scheme. In fact it is taking part in it.

On the face of it the scheme looks attractive. I admit even being interested in it myself initially. However once you understand the motives behind it and the reality of it we see how dangerous it can be.

You can see how it can become very expensive for someone who takes on this scheme. They are paying a mortgage, rent and service charges, not to mention maintaining 100% of a property they don't fully own.

Many newspapers were initially very critical, until building companies started taking ads out in their papers advertising the scheme.

The service charges and rent often rocket and the homes are almost impossible to sell leaving owners completely trapped even when they need to move in an emergency. You can read some people's nightmare experiences here.

Now, in what can only be described as utter madness, the UK government's latest plan is to guarantee 95% mortgages. The 'New Buy' or mortgage indemnity scheme (MIG) only requires a 5% deposit from the buyer and if they default the government will pick up the tab along with the bank.

The government is trying to artificially inflate demand in the short term to boost the construction sector and push house prices up so everyone feels wealthier. This should also boost consumer spending and the economy as a whole. But this is a typically short term politically motivated view. The current government cares nothing for a future crisis which might occur in 10 years' time. At some point the market will have to correct to an equilibrium level and the more we inflate prices artificially the bigger that crash will be. All the jobs created will be lost along with many more as well.

Nothing has been learnt from the recent crisis. With a government guarantee, banks and mortgage brokers will be flogging mortgages to anyone they can. This is exactly what happened before the recent crisis in America. Just look at Fannie Mae and Freddie Mac.

When prices do start to fall owners will have no incentive to keep paying their mortgages as they move into negative equity. If house prices fall by 20% and you have only put down a 5% deposit what incentive do you have to keep paying the mortgage? As prices continue to fall this gets worse and turns into a negative cycle.

When the bubble does burst the ensuing crisis will be just like the recent one, except this time instead of the banks bearing the brunt of the loses, it will be the you and I the taxpayer.

Unfortunately we never learn from our mistakes. We must stop creating these damaging bubbles. We should just let the housing market correct itself naturally; unfortunately the government just can't help itself. It is now just a matter of time before the next major sub-prime mortgage crisis. I just hope we can survive the fallout.

Around the Web

Subprime mortgage crisis - Wikipedia, the free encyclopedia

What is a subprime mortgage?

What Is a Sub-Prime Mortgage Lender? - Mortgage Professor

Right to buy scheme - Wikipedia, the free encyclopedia

Buying your council home - the Right to Buy scheme : Directgov ...

Council house 'right to buy' discount increases to £50000 | Society ...

Government revive Thatcher's 'Right to Buy' scheme: 2m council ...

Council homes right-to-buy discount will be doubled - Telegraph