Transaction volumes are already thin but plans being considered by the FSA to restrict mortgage lending could tip an already fragile housing market over the edge – and the FSA themselves agree!
The Mortgage Market Review is looking at imposing tough new standards on lenders putting an end to what were described as self-certified mortgages or in some case became known as ‘Liar Loans’. The FSA themselves state in their press release slipped out over the summer holidays that almost half of all mortgages offered between 2007 and the first quarter of 2010 were provided without a customer having to verify their income – a BBC report said that in the first quarter of this year alone 43% of all mortgages were still ‘non-verified’.
There are nearly a million homes for sale at present. In July just 81,000 sold of which according to the CML 56,000 had a mortgage. If the number of mortgages were to be culled by 40% then those who have to sell will have little option but to slash their prices to try and capture one of just 50,000 buyers. The Halifax price index fell by 24% when transaction volumes last dropped to these levels through 2007/8.
It is truly shocking that more than a year after the banking crisis lenders still seemed to be peddling these toxic products. It beggars belief that the architects of the financial meltdown seemed to have learned nothing from the global credit crunch and continued to lend to borrowers without checking that they were actually able to afford them. Little wonder that the FSA are considering asking lenders for what they describe as ‘robust affordability assessment requirements’ for new borrowers and a cap of 25 years for a mortgage.
The timing is made worse because while tax payers were bailing out the banks in the first quarter of this year there were just 112,000 loans, down from 171,000 in Q4 of 2009 according to the Council of Mortgage Lenders (CML). Last week the CML confirmed that gross lending volumes in August were 14% lower than July and approaching levels not seen since 2000. If the FSA rulings were to effectively remove half of these transactions then the housing market would see prices fall like a stone. The FSA’s own consultation document confirms that “…it did project significant falls in house prices from the reduction in lending””
We were expecting roughly 800,000 sales this year which is well below the highs of three years ago when over 1.6m homes changed hands. If no mortgages are to be advanced to borrowers who are unable to satisfy new tougher scrutiny then transactions could fall to less than half a million. At that level the residential market comes close to seizure.
We need to think about this very carefully. Reckless lending may have got us into this mess in the first place but we should prepare for the pain than will come by cracking down on these questionable practices. Doing this now could decimate the market driving prices down by as much as 25% at a time when many commentators are already predicting 10% falls for the remainder of this year.
Prices are already on a downward trend in many areas. Average loan to values over the past 18 months have hovered around 75%. “A fall in prices of 25% could see as many as 1.5m home owners slip into negative equity. The remainder of this year will be critical for the property market and the outlook for 2011 looking bleak.