I must disagree with the writer of the letter in the August 23 issue of Mortgage Strategy titled ’We need to get some perspective on what caused the recession’.
The writer argued that for the majority of people the markets worked well and the banks made money out of it. This had been emphasised by the fact that after one of the worst recessions in 60 years, repossessions in 2009 were still lower than at the tail end of the last recession in 1995.
The main problem was the irresponsible lending that took place that first came to light in the US sub-prime market.
As a mortgage analyst, I advise business and investment analysts on the level of risk taken by mortgage lenders, and for many years leading up to the recession I expressed great concern.
Once the recession started to bite, share prices of the main mortgage lenders plummeted.
The poor quality of their lending then made it difficult for the lenders to borrow themselves and, if they did, it was at a premium rate.
The big issue at the moment is that the lenders appear to have learnt virtually nothing from a risk perspective so they are going to continue to struggle to borrow and it will continue to be at premium rates.
One of the main problems is the use of credit scoring, which not only doesn’t work, but actually makes lenders’ decisions worse – yet many are still using it.
But let’s look at something simpler than the complexities regarding why credit scoring doesn’t work. Let’s take affordability as an example.
Assume a customer earns a basic salary of £40,000 per year gross. This means that after tax and National Insurance, they takes home around £2,500 per month net.
Now all anybody has to do is to go on to lenders’ websites and follow the ’how much can I borrow?’ link.
They then complete the boxes to show that they are earning £40,000 a year gross but that they have monthly loan commitments of £2,500. So every single penny the customer earns is already taken up on existing loan commitments and they have no money left for food, transport, clothes, Council Tax and so forth. They are already hopelessly over-committed.
Yet what do we find? Alliance & Leicester will lend more. Santander will lend more. Lloyds Banking Group, which includes most of the old HBOS brands, will lend you more. Heaven forbid, even Northern Rock will still lend them more.
So even now, after everything we’ve been through, we still have numerous lenders with affordability routines that can only possibly have been designed to facilitate lending to financially over-committed customers.
Until, mortgage lenders start acting prudently, funds will continue to be in limited supply and at premium rates. That, I believe, is the perspective that is lacking.