Industry should learn from reckless lending
June 13, 2009
A report that was released earlier this month has blamed the ongoing financial crises on reckless lending, and has claimed that lenders should learn by further restricting their lending regulations to ensure that this sort of problem does not arise again in the future.
The report by the Institute for Public Policy Research has suggested that lenders are more stringent with regards to deposit levels for mortgages loans as well as with income multiples that are offered to borrowers.
The institute has suggested that income levels are capped at three and a half times the applicants’ salary, and that mortgages should not be allowed unless the borrower has a deposit of at least 5 percent. The latter should not prove to be a problem, given that most lenders are looking to get more than the once traditional 5 percent deposit from borrowers in order to secure their most competitive mortgage rates.
The report also referred to the over-valuation of building societies such as Northern Rock, and it stated: ‘It is clear in retrospect that the demutualisation of many of the major building societies, and their increasing reliance on wholesale funding to fund a greatly expanded loan book has proved nothing short of disastrous given the credit crunch which has highlighted the fundamental weakness of lending long and borrowing short on the wholesale markets.’
It went on to state: ‘In addition, the rapid rise in mortgage arrears and defaults has again highlighted the dangers of lending at over-generous multiples of house values and incomes. While the expansion permitted more households to enter home ownership, it did so at gre sat cost both to those individuals who now find themselves deeply indebted, with negative equity currently estimated at 900,000 households (Council for Mortgage Lenders 2009) and in some cases facing repossession and also to the Treasury and the nation as a whole who are now picking up the rescue bill.’
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