Nanny Turner knows best

20 October 2009

As it declares in paragraph 1.41, until now its approach has been underpinned by a view that mortgage consumers will use rationality to protect their own interests. “We believe that we need to change that approach”, it states, “recognise the behavioural biases of consumers and be more interventionist to help protect consumers from themselves.”

I’m not sure if this amounts to an acknowledgement  that its financial capability programme is as bankrupt as the Icelandic banks or a recognition, after being in the job for almost a decade, that people don’t buy mortgages, they buy homes. The mortgage is a means to an end and the primary focus, especially for a first-time buyer, is on acquiring a home that they can call their own.

So is Turner’s nanny knows best approach justified and how far does it go? Well, the Mortgage Market Review doesn’t set out to regulate products, which is a relief, but it brings to the debate its prudential reforms, which it claims are alone insufficient to protect the vulnerable, and proposes more stringent conduct of business rules because the swinging new capital and liquidity requirements aren’t enough to keep the lid on risky loan to value ratios.

Try telling that to the building societies! Many of them have seen their lending halve and their profits tumble as a result of the FSA’s measures, their predicament compounded by contributions to the Financial Services Compensation Scheme.

Given this, the FSA’s defensive stance on non-conforming lenders and the measures to reduce proc-cyclicality – basically Basle II in reverse – mortgage funding is going to remain the biggest constraint on the market for the foreseeable future and dampen competition to the detriment of the consumer.

Other things – like bringing second charge lending and buy-to-let mortgages within the remit of the FSA – are long overdue but hitherto it has always argued that its responsibilities are defined by the Treasury and it simple executes the will of the chancellor. Obviously that perception has changed.

But ultimately it would seem that having taken a big hit with the fall of Northern Rock and the collapse of the securitisation model the authorities don’t really want to see a return to the lending volumes of 2007 but surely this should lead to another debate on the future level of home ownership and housing policy?

The steam has gone out of the remortgage market but that’s a symptom of the mortgage funding problem and doesn’t mean lenders will switch their attention to new homebuyers. Turner may know best but when all is said and done first-time buyers are at risk of becoming the new sub-prime, so where will be the financial stimulus to meet the demand for housing created by immigration and increased household formation?

It can’t come from the public sector because that is probably as over-indebted as the average sub-prime borrower but the Chinese haven’t called the debt in yet. Perhaps three families to home, along the old soviet model, might be the solution – splitting the energy bill three ways would be eco-friendly and make the mortgage just about affordable.