Defending our system of mortgage regulation against the threat of even more rules and red tape from the European Union, Michael Coogan, director general of the Council of Mortgage Lenders, used to argue that we had one of the most competitive and innovative mortgage markets in the world, if not in the entire universe.
No one called his bluff (no pun intended) and with good reason. Given Brussels’ propensity for minutiae (for God’s sake it even determines the dimensions of the bananas we eat) and our general ignorance of what’s happening in the rest of the world, we had a vested interest in defending our way of doing things and no reason to embrace change. If it ain’t broke, why change it?
Part of Coogan’s argument was predicated on the fact that competition in the UK had generated product innovation. Thus we had buy-to-let, sub-prime, equity release, and shared equity mortgages, to say nothing of self-cert and open plan variants of these products and, the piéce de résistance, Tony Blair’s future earnings mortgages.
The big surprise was that homebuyers in mainland Europe weren’t smitten with envy, or running to the barricades demanding mortgages d’Anglais but, like us, they were happy with the way they’d always done things. Change makes us uncomfortable,
Of course Coogan was almost right – we did have an innovative market although we could have been more innovative in a sustainable way. But however innovative it was, its now operating in a virtual limbo and competition has locked into reverse. Having a Ferrari stuck in the garage is no consolation when you just want to get to the supermarket.
The proposal to allow lenders to swap mortgage books for government bonds may improve liquidity but in the longer term we have to recognise that regulation has failed to keep pace with innovation – that’s why we have a regulator that has put pressure on lenders to hold onto their cash and a central bank that is reluctantly pumping billions of pounds back into the system!
It’s also ironic that under the Basel II Accord banks like Northern Rock have been able to cut back on their capital. That framework is now being revised so that banks will have an adequate financial cushion if they deal in such things as collateralised debt obligations which were the route of contagion in the US sub-prime crisis.
In the same vein the Financial Services Authority will be a report on liquidity next month with a full consultation paper promised for the summer. By that time the patient may well be on the way to curing itself. In other words the time scales that the authorities have allocated to the current situation would seem to be inappropriate in the context of a crisis but this has been the hallmark of the regime since the Northern rock debacle began. Perhaps it’s time to throw the rule books on the fire and start all over again?