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Samuel Dale Headshot

Has This Government Forgotten About the Sub-Prime Crisis?

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As Gordon Brown never tired of claiming, this financial crisis began in the US housing market.
So-called NINJAs loans were lent to US borrowers with no income, no job and no assets and formed the crux of a sub-prime crisis that floored the world economy.

The story of individuals being lent money they could never repay by US mortgage brokers and lenders is well known and often recounted.

The brokers took their commission, the lenders securitised the deals, the rating agencies gave them the stamp of approval and everyone moved on all the richer.

This was the happy state of US banking, and parts of the UK market too, for a good chunk of the last decade.

Since the collapse of Lehman Brothers, and the discovery of mis-rated bonds infecting the banking system, there has been a clampdown.

In the UK our lenders claim they were never as bad as our American cousins while the Financial Services Authority clamps down on risky lending.

The City watchdog is protecting consumers like never before and after scandals such as the Payment Protection Insurance mis-selling a brewing mortgage mis-selling problem it is no wonder why.

After much debate and hand wringing lenders, regulators and governments all agree that lessons have been learnt and it will never happen again.

Therefore it is surprising to see the government backing a series of projects aimed at those on low incomes or supporting higher risk mortgages.

The NewBuy scheme launched on Monday March 12 is a government-backed scheme for lenders to offer mortgages with 5% deposits for new build properties.

The government support is needed because banks believe the loans are too risky to lend without it. The aim is to help individuals on to the housing ladder and to encourage house building by creating more demand through affordable finance.

It is a similar support as that offered to US lenders Fannie Mae and Freddie Mac in the United States for much of the last decade.

After a government bailout the two failed lenders remain in government hands along with trillions of dollars of mortgage debt.

In short, the government is backing a highly risky section of the mortgage market because the private sector won't touch it.

The same logic applies to chancellor George Osborne's credit easing policy to boost business lending. State run projects created to take risks private companies wouldn't dare to take all because the economy needs a boost from somewhere.

A similar logic runs through the Right to Buy scheme where low income families are being encouraged to buy their homes with massive discounts.

Housing minister Grant Shapps now claims there will be discounts of up to £75,000 on London council homes.

These are people who would never be able to save up such vast amounts for a deposit effectively being handed it on a plate.

They can then take out a mortgage with instant equity but no savings pumped into the deposit.
Mortgage lenders' risk teams are convinced there is a behavioural change if a buyer has to invest large amounts of their money into a property.
Basically, if you save up £75,000 over a decade you will care more about the property you have bought as well as demonstrating financial competency by getting the cash together.
If the government effectively gives you £75,000 for nothing then there isn't such an emotional investment or financial commitment being put into the property. It is inherently riskier for lenders.
All this sits at odds with a government that has openly discussed capping mortgage deposits at a minimum level to take the heat out of housing bubbles.

It has also backed capital requirements proposed in Basel and by the Independent Commission on Banking - designed to make lending safer.

But for housing the government is caught between a series of desirable scenarios.
It wants to boost the construction sector as a key driver of growth, support the aspiration of home ownership and create a safer banking system.

It leads to a muddled approach where the government can seemingly support risky loans while condemning them out of the other side of its mouth.