So, Gordon Brown now wants to discourage 100%+ mortgages. This is no better an idea now than it was when Vince Cable suggested it. It's a pretty daft idea in general, but even if you thought it might be a good idea at some point, now is certainly not the time for it.
Let's remind ourselves again why 100%+ mortgages came in (and, indeed, it's also why sub-prime mortgages got going, but I'll discuss that another time). In the early 1990s there was a significant house price crash - not nearly as significant as our current one, but it seemed pretty big at the time. As a consequence of this, many mortgage-holders were in negative equity. This meant that if they moved house, even if they bought a cheaper house than their current property (thereby reducing their mortgage and monthly outgoings) - indeed, even if they just changed mortgage provider to someone offering a cheaper deal - they would require a mortgage of above 100%. The alternatives would be for them (a) to stay put and tough it out - perhaps in a larger place than they wanted or stuck in a job they no longer wanted to do; (b) default - perhaps because they lost their previous job and without a 100%+ mortgage they could not move to get another job, or perhaps just because without trading down to a cheaper place they could not afford to keep up the payments.
This was a significant issue in the early 1990s, because particularly for building societies, the regulations did not permit above-100% mortgages.
By 2011 we are likely to have above 4 million people in negative equity in the UK. There will also be perhaps 4 million unemployed (on my scenario of just a 6%-7% recession - if we do have a 10%+ recession, there could be above 5 million). People will need to move house to look for work. They will need to move house to trade down so they can reduce their monthly outgoings. In order to do these things they will need 100%+ mortgages.
Consequently, once we are through towards the pit of the housing market, there is going to be enormous demand for 100%+ mortgages. There is going to be a huge economic imperative for them, also - it will be efficient to have such mortgages, and the inefficiencies introduced into the economy by forbidding 100%+ mortgages would cause untold economic damage and human misery.
I will disagree with banning 100%+ mortgages even when we are next entering a housing boom. But let's have that discussion then - some time in the 2020s. Through the 2010s it would simply be economic insanity to try to prevent 100%+ mortgages. Let's abandon this ridiculous idea now.
