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Reintroducing the right-to-borrow

Looking at the current mortgage funding crisis and the fall of the former building societies such as Bradford & Bingley and Halifax, it is fascinating to note that back in the 1980s the Building Societies Association was lobbying parliament for new legislation which would allow its members to become mortgage banks.

And intriguingly, a key player in the BSA team putting together a green paper on legislative reform was a young and talented economist, Adrian Coles who now, as director general of that very same organisation, has the mantra, mortgage banks bad, building societies better.

Apologies for the allusion to Animal Farm but the homage to Orwell serves to illustrate the danger of soundbites and the illusion of logic that they can lend to some of our less than lofty thoughts.

But I digress – the rationale behind the need for building societies to become banks was predicated on the perception that the housing market that they served was mature.

The problem was that there was little room for growth but they couldnt venture into pastures new because as they were then constituted, the opportunities for diversification were limited.

So in a maturing market building societies had to have the freedom to evolve but the problem as the BSA saw it back in the mid 1980s didnt materialise in the way its leaders had anticipated – the right-to-buy fuelled aspirations for home ownership, asset values increased, inflated by housing demand, and people used remortgaging as a mechanism to tap into their new housing wealth.

The ball game had changed and along with it the framework in which the housing market operated. As HBOSs Phil Jenks says in an interview in our December/January issue of Lending Strategy (out on 10 December): If I go back to 1995 and the Halifax merger with the Leeds, and out of that demutalisation, I think most of that was about how to cope and grow the business and dealing with the question, how do you satisfy the growing demand for housing?

So in essence you see the government stepping back from funding housing and the banks taking their place and growing their funding, so probably for me, I guess the challenge is where do you draw the line?

As I remark in the interview, its an interesting gambit. Theres nothing new about successive governments driving the growth of home ownership and the idea that this led to banks and building societies lending to people at the margin but I had never thought of the roots of our current problems being in part attributable to a funding dilemma brought about in part by right-to-buy.

Its an intriguing idea and with the number of people on the waiting list for social housing having grown by 61% since 1999 to 1.67 million, shouldnt the government be revisiting its right-to-buy policy? After all, between 1999 and last year the overall number of social homes – both council and housing association – fell from 4.3 million to 3.9 million.

Given that backlog, the alternative might be to reintroduce the right-to-borrow but that might meaning fixing the mortgage market and that still looks a fix to far..

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