100% mortgage RIP

The disappearance of the 100 per cent mortgage is being heralded by many as yet another sign of the credit crunch getting worse as lenders retract from the market, increase the deposit they require or refuse to take business at all.

But one question that no-one seems to have asked is whether 100 per cent mortgages should have been made available in the first place.

For months now lenders have been pulling out of the housing market virtually competing to refuse business where a year ago they were falling over each other to lend money to potential homeowners.

As we saw last week, First Direct has had to temporarily shut its doors to new business because of an overwhelming response to its products – hardly a surprise given it was offering one of the most competitive products out there.

The lender was quickly followed by both the Co-operative Bank and Salt – a subsidiary of the Derbyshire Building Society. And then the Halifax and Nationwide re-priced their products at the end of the week.

Abbey pulling its 100 per cent mortgage should not come as a surprise, nor should it been seen as an indication of the housing market going bust. If anything it is nothing more than a sensible rational move by a bank that since it was taken over by Banco Santander has been trying to concentrate on increasing the deposits it holds through encouraging its customers to save more. Quite frankly the most surprising thing is that Abbey didn’t do it sooner.

Which brings us back to the question of whether 100 per cent or 125 per cent mortgages - as were being offered by the Northern Rock this time last year - should ever have been offered to consumers?

Behind closed doors most lenders would probably admit that they shouldn’t have. But the problems they faced in the years since regulation by the Financial Services Authority (FSA) in 2004 have included spiralling costs and a massive increase in competition, so their argument for offering such products was a simple one – the other guy is.

It is not as if doubts were never raised about offering such products either, when they first became available there were concerns that offering 100 per cent mortgages was irresponsible lending. But such concerns were brushed aside by the argument that homeowners would never fall into the negative equity trap again because demand for housing was too high, unemployment was at a record low, inflation was under control and interest rates were also historically low. What no-one saw coming was the US sub-prime housing crisis.

So we now find ourselves in a situation where lenders are pulling back to more tried and trusted forms of lending. So no more automated valuation models – designed to speed up the valuation process so a mortgage offer could go through to completion in less than 24 hours in some cases. Affordability calculators – whereby a potential borrowers other outgoing are taken into account to see if they can afford a higher mortgage - are also falling by the wayside in favour of the more traditional three times income calculation. And if you’ve got a bit of a sketchy credit history then it’s going to be very difficult to obtain a mortgage, full stop.

Is this all a bad thing? No absolutely not.

Whether they admit it or not lenders were irresponsible by offering mortgage loans at 100 per cent of the value of a property and such loans did help – though not exclusively - to artificially inflate house prices, which means that there are going to be at least some homeowners who will fall into negative equity.

Moreover, those lenders that have made loans of 100 per cent will probably become victims of the negative equity trap as well because the more homes they repossess and are forced to sell at auction the more money they will lose.

Will 100 per cent mortgages return? Hopefully not. With any luck one of the things many lenders will have learnt from the current crisis will be that 100 per cent loans are a step too far.

Lenders are clearly concerned about the implications of selling such mortgages as well. According to a recent survey by law firm Moore Blatch, they want the FSA to introduce mandatory risk warnings and produce guidelines on levels of acceptable borrowing.

And back in February the Financial Services Consumer Panel (FSCP) raised concerns consumers don’t know what the City watchdog’s rules on repossessions are and that lenders are already beginning to exploit this.

At the time John Howard, chairman of the FSCP, said: "We have heard that some less scrupulous lenders are rushing to repossess properties without the courts considering the FSA rules on repossessions. And despite appalling stories of the mis-selling of mortgages, the sales tactics used are rarely taken into account in the court case.

“Clearly if a lender or mortgage broker has acted irresponsibly by persuading someone to take out a mortgage they cannot afford, a much more lenient view ought to be taken of the householder’s case.”

So really whether 100 per cent mortgages return will probably depend on just how many people claim they were mis-sold them in the first place. That could be quite a large number of people.


Matt West