Some people might be somewhat confused lately by the whole banking and lending situation, and I have to say I completely understand why. We have seen billions upon billions pumped into the banking system and for some reason we still have a situation where it appears lenders don’t want to lend money so people can’t buy property or develop what they have or even get extra borrowing to spend on the high street.
Moreover, efforts in the shape of reduced interest rates, the like of which we have never seen before, has failed to encourage the lenders to lend, or the consumer to borrow money in order for them to spend. The question here is simply why?
It is obvious the banks are undecided of what their assets are. It could even be argued they have little knowledge of their liabilities and these two elements could describe why they find themselves in such disastrous circumstances which for many people could be described as a financial crisis.
For the most part this has been caused through their indecisiveness as to which will be a sound loan and which will not. In other words, they are trying to avoid liability to their businesses caused through a bad lending, with the obvious consequence that they are reluctant to lend for fear of what will happen.
You might be forgiven for thinking that this is the sole reason we are in this situation, banks don’t want to lend because they don’t know what position they are actually in. Well this is only part of the story. Banks have, to put it bluntly, woken up. They have realised that the way they have lent in the past cannot continue. They have spent most of the last four or five years lending well in excess of 95% and to top that they have also been lending on a self certification basis to a lot of borrowers.
This essentially means that their lending book is full of very high risk business. So having realised this they are not predisposed to lending any more in this way. However the problem is they have lent so much money in this way to so many people it is quite difficult to find a client with a low loan to value mortgage and someone who is happy to provide full proof of income.
The big question then is if the interest rates are encouragingly low and there is plenty of money in the banks for them to lend to clients, surely we are all rushing out to spend? I think not and that is purely down to their difficulty in essentially finding someone happy to lend 90% to 95% or 80% on a self cert basis.
What does this all mean? I personally think that it may be a good few years before the market for mortgages comes back and that is if it comes back at all. We might have seen an end to the way we used to mortgage our properties. No more self certification and no more high loan to values. The problem is house price inflation over the last five years or so has been fuelled by the ease of these mortgages. We probably should have been unable to get a large proportion of the mortgages we have. So the future could be about waiting till our wages and deposits get up to the levels that house prices actually are, or wait for the property to come down, now that is a scary thought indeed.
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