Categories: Credit Crunch / Crisis management
24 November 2008
Welcome home truths about the mortgage crisis
There’s an arctic snow storm outside. Even my Dachshund refuses to leave the house. So whilst we’re gratefully holed up in my Swiss home I’m going to write about those losing theirs in the UK. Naturally, I’m interested in the explanations given by the institutions which are turfing them out.
Let me declare an interest. In the late 1980s early 90s I led media relations for both the Council of Mortgage Lenders (CML) and The Building Societies Association. Like Gordon Brown and Kenneth Clarke, I thrive on crisis. (Sorry, that’s the nature of lots of work – from the priesthood to journalism.)
Back then up to 75,000 houses per year were possessed by lenders, compared to an estimated 45,000 expected this year. But who knows what next year will bring. It does not look good. On Friday the CML released arrears figures that revealed that 168,000 mortgages were three months or more late with their repayments. That is 8% higher than the 155,600 at the end of June.
The statistics are important because they indicate the number of homeowners living on borrowed time in houses that may soon be put up for auction to pay off debts. But what gets forgotten is that defaulting mortgagors (for the sake of clarity mortgagees are the lenders) represent just 1.44% of all borrowers. That means that 98.56% are managing to keep up with their repayments.
The housing market is suffering, sure. But it remains a British success story. British houses are still worth many times what they were twenty years ago when I became the industry’s spokesman.
Nevertheless, banks and building societies have to accept some of the blame for this crisis. They became, in polite English, imprudent. Lenders, governments and central banks failed to constrain an expansion of credit that drove an unsustainable boom in house prices. But hang on a minute.
Borrowers now complaining about “over-priced” fixed-rate mortgages or endowments that look set to fall short of paying back their mortgage don’t have much of my sympathy. This was the biggest investment of their lives. They were adults taking risks, sometimes reckless ones. They made choices. They presumably read their contracts before signing them. Now they, the minority in real trouble, have to face up to their responsibilities. Letting them escape their debts is not an option, not least because it would discourage the rest of us from repaying ours.
But the good news is that it is not in lenders’ interest to take back properties except as an action of last resort. The government seems more determined than in the 1990s to find solutions that keep people housed. I think that makes sense.
Getting into a mess is one thing, managing it another. This crisis could easily have become a disaster for mortgage lenders. However, the CML has taken the PR initiative. As a result the industry has won more praise than criticism for its efforts. Therefore, the CML’s work is worth noting in detail:
- It came out fighting when its members were criticized for not passing on the full BoE interest rate cuts to hard-pressed borrowers. It explained the complexity of the market and different types of policies that borrowers held. It explained the difference between LIBOR and base rates. It explained its members’ duty to both savers and borrowers.
- Mortgage lenders came in for some bad press for speaking market truths. But it had to be said otherwise honesty and integrity would have gone walkabout. Moreover, by voicing market realities early on, the CML made its long-term work of defending its members’ interests and winning public acceptance easier. The bad press is no longer such an issue, but the market has not shifted much.
- Its Director General Michael Coogan said on air that the CML never favoured 125% mortgages (which was brave given some of his paymasters did).
- It helped expose the damaging criminality in the buy-to-let market which involved mortgage professionals and borrowers colluding.
- It publicised far and wide how how borrowers can help themselves and lenders protect their mutual interests.
- It explained why sometimes it is in the interests of both parties for homes to be possessed, stating that’s why many owners just hand back the keys.
- It released more information than ever on the state of its members’ mortgage books so that the government and public were forewarned of what to expect in the future.
- It worked with its members, government and consumer groups to manage this very challenging situation creatively.
This is a developing story. Lenders and borrowers recently lost sight of what the market was all about: providing homes for people to live in. Lenders must end the lending freeze as soon as possible, on responsible, sustainable terms. They have got to get back to their day job.
Meanwhile, the CML deserves to win a prize for its crisis management skills.