The return of the liar loan and what that says about the housing market
The self-cert mortgage, banned by the FCA, is back. And the company offering them is overwhelmed by the volume of applications.
We've been looking for signals that tell us that the UK housing market is getting a little out of control again. Last week gave us a new one (for this cycle at least): the return of liar loans. These might have banned by the FCA last April, but it turns out you can still get them.
A new lender, selfcert.co.uk, has set up in Prague to offer them to UK homebuyers. It's going well. So many would-be borrowers have already approached the firm that, according to its CEO, "we are out of our depth in the number of people we can help". There is now a 4,000-person waiting list.
You can see why this might be. Some of the people who took out loans before the crisis (when 50% of the mortgages offered were self-certified) no longer qualify for new mortgages under the new Mortgage Market Review (MMR) rules designed to make sure people can afford to repay their mortgages.
That means that, when their discounts or fixed rates run out (as they now have), they end up stuck on their lender's standard variable rate. That means rates of 5%-6% rather than the 2%-3% the rest of us are paying.
But while it might be entirely rational for these people to be allowed to remortgage via a self-cert mortgage (particularly if they have significant equity) what about those who don't yet own a house? Does it make sense for them to be allowed to guess what they can afford? Libby Purves thinks so.
In her column this week, Purves refers to the MMR rules as a "binding dragging brake on lives". She hates the admin in it (in its first year, the average time taken to get a mortgage rose by a third), and she hates the way it has "forced the individual to outsource prudence and judgement to a financial institution's algorithm".
All the MMR does, she says, is to tell borrowers that they "can't be trusted" to make their own decisions about their futures. It infantilises them and, in doing so, keeps them out of the market unnecessarily: "in London you might easily have watched your desired flat shooting up by £50,000 and out of reach" while waiting for a lender to interview you about your soya latte habit.
I'm partially with Libby here. A person's finances in one year aren't the same as their finances in the next. Most people earn more as they enter their 30s. Chuck in a little inflation, and their mortgage payments will clearly get easier over time. Then think about the ludicrously high cost of moving in the UK, and it does make some sense for the young in particular to borrow way more than the MMR rules allow them to so they can buy a family house. But. But. But. If there are no limits on things, those things will always go too far. The banks will lend too much, people will borrow too much, and it will all end nastily.
We could fix this in other ways. We could let interest rates rise to a more normal level (which would cut house prices and hence the amount people borrow in the first place). Or we could treat the banks more harshly increasing their capital ratios, removing the deposit protection for their customers, or making directors financially liable for failure, perhaps to force more responsible lending.
Clearly, our policymakers have no intention of doing either of those things. And if we refuse to arrange our system so as to encourage lenders to be sensible, but we still want to have a hope of avoiding another housing bust, there is, I suppose, no choice but to force borrowers to be good.