I heard Vince Cable on Radio 4 yesterday, doing his usual routine about how foolish and irresponsible the banks were lending people more-than-100% mortgages, and how policy in the future must not allow this to be repeated.
I'm not proposing today to dissect the history of the credit crunch, but one thing I will urge: the very last thing policy should do, starting from where we are, is to ban or discourage more-than-100% mortgages. And, for exactly the same reason (which I shall explain in a minute) all those bankers we are seeing in the media saying "The above-100% mortgage is gone for the foreseeable future" are also wrong. More-than-100% mortgages will be back very soon, and they will be vital to the health of the economy.
Let me explain. Until the early 1990s, mortgage providers were not permitted to offer mortgages greater in value than the value of the property against which they were secured. Presumably Vince Cable approved. The consequence was that in the early 1990s housing crash, once people went into negative equity they were unable to move house, even if by doing so they would reduce their monthly mortgage bills. So, for example, if they had a £200,000 mortgage on a house now worth £150,000, and wanted to move to a house now worth £100,000, it would make sense for them to be able to have a 150% mortgage on the new property, with their monthly mortgage payments reducing by one quarter. But that was not allowed. Consequently, people with negative equity found it very difficult to move without declaring themselves bankrupt. Since they could not move, then if they became unemployed they could not seek a new job in another part of the country where the labour market was better. This factor contributed materially to the growth in unemployment at the time.
Since house prices are falling at a much faster rate than in the early 1990s, and are likely to fall much further in the end and probably thrust materially more people into negative equity than back then, demand for more-than-100% mortgages is likely to grow rapidly within about eighteen months' time. It would be economic lunacy to introduce any regulation, at this stage, to prevent more-than-100% mortgages, or for regulatory authorities to be instructed to discourage such lending.
