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Which mortgages were ‘foolish’?

The BBC website reports:

Banking minister Lord Myners has said banks were “foolish” to offer 100% mortgages, after Gordon Brown called for “prudent and careful” lending.

Er, no, I don’t think that’s the cause of the current problem, although it certainly doesn’t help after things have gone wrong. But it surely didn’t start them on that track. No, that was clearly something else.What was really stupid of the banks and mortgage lenders was lending money at such high multiples of annual income. At one time it was possible to get a mortgage of 6 to 8 times ones income! Now that was irresponsible.

Even before the last upward rush in house prices of the last few years, it was reported that the average house price had risen so high that the only place in the country that could afford to buy an average house was Hull. That had the cheapest houses in the UK, but it was also the only place were an NHS nurse could afford a mortgage based on three times income.

After that, nowhere had houses that could be afforded on such a mortgage. And that’s where things went bad and lenders lent too much so that house prices went really crazy. That’s where it all went wrong – offering mortgages to people that had no way to pay them back.

That’s where the FSA needs to concentrate – not on Loan To Value. It’s Loan to Earnings that cause all the problems. Loans are not paid only when they cannot be afforded, not when the item for which they were take is no longer worth what is was. If that was the way, no car loan would ever be repaid!

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