What the Treasury Select Committee missed in its report

Posted on 11 August 2009 by Ray Boulger

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As promised in my previous post I will now comment on the second part of the Treasury Select Committee’s brief, i.e. access to mortgage finance, in its report entitled “Mortgage Arrears and Access to Mortgage Finance” it published on Saturday.

The committee has interpreted the second part of the report very narrowly, considering only first time buyers, the sub prime sector and remortgaging. I conclude from this it hasn’t recognised that the problems go well beyond these sectors. For example many people who want to move house are unable to do so.

When most people move they rely on the equity in their property to provide the bulk of the deposit required for their new property, currently a minimum of 10% in most cases, plus moving costs, of which stamp duty land tax is often the biggest. With around 2m households either in negative equity or with equity of less than 10% (recent CML estimate) plus my estimate of another ½m with equity only between 10% and 15% there are about 2½m such households who can’t move (unless they sell up and rent). This is not only a serious problem for the households concerned but a lack of mobility for a substantial number of homeowners also has important macro economic consequences. Fortunately, with house prices now rising the scale of this problem should diminish.

Another group of borrowers not mentioned in the report are those with a self certification mortgage. Like sub prime mortgages this category of mortgage has almost disappeared and this means that most of the ½m households I estimate have a self cert mortgage will also find it very difficult to move. Add to this the ½m households I estimate to have a sub prime mortgage and this means a total of 3½m households out of approximately 10m with a residential mortgage will currently find it very difficult or impossible to move.  

In evidence to the committee Lord Myners, Financial Services Secretary, demonstrated a complete failure to understand the state of the market by saying that there is a “very competitive market for mortgages.” One has to wonder what planet he is on. Anyone helping to shape Government policy from a position of such naivety is very dangerous.

A very pertinent point was made in evidence to the committee by Adrian Coles, Director General of the Building Societies Association. He explained how the current incentives created by the credit rating agencies and the FSA actually prevented some lenders from offering higher LTV mortgages because larger exposure to higher LTV lending risked the lender being downgraded by the rating agencies, who in my view have far too much power, particularly as they are completely unregulated.

A serious consequence of such downgrading would be to increase the lender’s cost of borrowing from the wholesale market. It might even result in some investors such as local authorities withdrawing their deposits as they are not allowed by Government to invest in banks or building societies whose credit rating falls below a certain level. Rather ironic when the Government allowed these same local authorities to invest in the Icelandic banks which went bust because the rating agencies were too incompetent to recognise the problems in those banks and so gave them a rating high enough to allow the local authorities to place deposits with them.

Mr Coles also pointed out that having a large proportion of high LTV lending might encourage the FSA to take “severe action” against the lender because the FSA’s stress tests assume a very severe reduction in house prices.

One FSA rule the majority of lenders, albeit with some honourable exceptions, have been riding roughshod over ever since the FSA started regulating mortgages in October 2004 is the requirement not to do anything to inhibit consumers shopping around. Despite some lenders consistently breaking this rule and hence being a serious impediment to access to mortgage finance for some consumers the Committee appears not to be aware of this problem as there is no reference to it in their report.

I am referring to the fact that the only way to be reasonably confident not only whether a lender will lend but how much they will lend is to submit a DIP (Decision n Principle) and the lender quite rightly then normally undertakes a credit check. However, instead of doing a quotation search, which does not leave a footprint on the credit file, most lenders do a full search and hence leave a footprint. Both searches give the lender the same information but one inhibits the consumer’s ability to shop around because their credit score is negatively impacted by too many searches. Now I wonder why lenders would want to inhibit potential customers shopping around?

Avoiding contravening this FSA rule is dead simple - all a lender has to do is refrain from recording a full search unless and until they receive a full mortgage application. That is the only time anything other than a quotation search should be recorded. If lenders complain it needs some IT changes that cuts no ice – they have had over 4¾ years to make any necessary IT changes.

I wonder if the FSA even knows which lenders use a quotation search and which don’t. If they don’t their starting point should be to find out. The committee should have asked the FSA when they intend to start enforcing this rule.

Categories: House and home, Mortgages, Property market, Regulation

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