Today a leading mortgage company has announced it is withdrawing for the time being from making any new mortgage advances. This follows hard on the heels of the governmentâ€™s decision to halve the amount Northern Rock has lent on mortgage over the next couple of years in order to repay the money owing to taxpayers.
In recent days mortgage rates have been rising, even though the Bank of Englandâ€™s message on interest rates has been to keep them the same. As one or two mortgage companies find they are offering the lowest mortgage rates, so they are inundated with people seeking a good value mortgage. They are forced by the rush into putting up their rates, only to leave another mortgage company exposed to the rush. It is going to be a difficult time for people seeking a mortgage, and a more difficult time for those with a variable rate mortgage, facing higher interest payments as a result.
Today Parliament will be debating mortgages on a Liberal Democrat motion. The LDs have been saying for some time that people in the UK have borrowed too much, and have been urging action to curb private sector borrowings. Presumably they wanted higher interest rates sooner, to choke off some of the mortgage demand, and probably want tougher regulations to make it more difficult for people on low incomes or with few assets to borrow.
I certainly opposed Gordon Brownâ€™s decision to tinker with monetary policy by changing targets for inflation from the RPI to the CPI. It meant the Bank of England had to set lower rates in the run up to the 2005 election than if they had kept the old target, and did mean more credit was extended. If the government had stuck with the RPI, and had kept a better control over its own borrowings, we would be better placed to weather the current financial storm.
I do not, however, share the LD view that things should be made a lot tougher for those on low incomes or with no cash for a deposit to buy a home. Home ownership is rightly much sought after, and is an important part of an English personâ€™s liberty. Once someone owns a home they make decisions about their private space in a way tenants cannot, and they have an asset which usually goes up in price which brings them greater financial independence as the years progress. There can be little worse financially than facing old age with no home that you own â€“ it means you pay the highest rents of your life at the end of your life when you have least income.
So what should the authorities do about the move from boom to bust in the mortgage market? They should not rush to regulate to dictate terms to mortgage companies., Saying now people cannot in future borrow 125% of the value of their property, or saying to those without deposits they have to save for one first would be seeking to bolt the stable door long after the horse has gone. Yesterdayâ€™s problem was too much borrowing. Todayâ€™s may easily become too little if the government is not careful.
The Bank should cut interest rates, to offset some of the unplanned increase in rates we have seen in recent weeks. It needs to try to get control back over the general level of rates in the markets. The authorities should not introduce new and more mortgage regulation. In a global market it is difficult for such regulation to bite if done nationally, whilst the consequences will be harmful to those seeking UK based loans, making them still scarcer and dearer.
It is probably necessary to cut Northern Rockâ€™s mortgage book because the bank is now nationalised and must not be seen to competing successfully to lend more money. It is certainly necessary to get the taxpayers money back in reasonable time. This will place a continuing strain on the mortgage market, as other lenders find the Â£50 billion to replace the Northern mortgages destined to be repaid. In these conditions the Bank needs to do all it can to keep the mortgage market reasonably liquid, without putting more taxpayers money at risk without more than adequate collateral and protection. The Bank should also be sympathetic to the idea that the banking sector should not have to write down all their good quality shorter term paper every time some financial institution has to dump some of it at distressed prices to raise cash, for that way leads to a race to the bottom with continuing dangers for some financial institutions.
It is important amidst all the puritan commentary telling us it serves people right, that they have borrowed too much and the financial sector has been greedy and irresponsible, to remember that people still need homes and home ownership is the best way of organising and financing that. The important task is to get rid of the froth in the market without causing a slump, for that would just put more people into misery and prevent the rising generation buying a home as soon as they would like.