Banning 100 Percent Mortgages Is Pointless

I've started contributing City View columns for Moneyweek. For anyone who can't access it online, here's a taster of a piece about why banning 100% mortgages was completely pointless. But do buy the magazine...

Gordon Brown has proposed that 100 percent mortgages should be banned. Slam. Barack Obama wants limits on banker’s pay. Slam. The German Chancellor Angela Merkel promises tougher regulation for hedge funds and rating agencies after a European Union summit in Berlin last weekend. Slam.

Right around, the world politicians and financial regulators are busy shutting doors on horses that haven’t so much bolted as climbed on board a rocket and left for a different planet. They are wasting their time. There is no point in trying to fight a banking-led financial and credit bubble now. It is too late. No doubt the world economy will recover eventually, and, in time, a fresh bubble will get going. But when it happens we’ll find a whole new way to mess things up – and it won’t be anything to do with the plethora of controls on the financial system now being proposed.

It would be better to devote time and energy to fighting the next crisis rather than the last one.

Take a look at Brown’s latest plan to save the British and world economy. Resurrecting the word prudence, which appear to have gone missing from his speeches in the last couple of years, the British Prime Minister argued for the return of the “traditional savings and mortgage bank” making loans “on prudent and careful terms.”

The old 125 percent, self-cert, buy-to-let, mortgage, with a discounted initial rate, plus a free flight on Ryanair chucked in, is now to be a thing of the past. Brown has banned them. Mortgages will only be made available to people who have saved carefully for a deposit, got a steady job, and presumably can prove they get to bed at a sensible hour and don’t drink too much either.

There’s a problem, however. The market has already done that job.

Maybe nobody has shown the Prime Minister how Google works, but it only takes about five seconds on the internet to discover that 100% mortgages are about as easy to find as Bernie Madoff’s trading records. There aren’t any 100 percent mortgages out there. There aren’t even many 80 or 90 percent deals available. To get a decent rate, you need to be putting up a 40 percent deposit. In reality, banks have returned to the policies they were satirised for many years: they’ll only lend money to people who can prove they don’t need it.

There is no real mystery about that. In a rising property market, it is perfectly good business to lend people 100 percent of the money to buy a property. If prices are going up 10 percent annually, within a couple of years, the borrower has a healthy chunk of equity in the property. It is only in a falling market that the maths turn toxic. Within a year, you are looking at 10 percent negative equity. And with the housing market still in freefall, banks need those 40 percent deposits to have any confidence their loan will still be backed by an asset at least equal to the value of the debt in three or four years time.

A ban of 100 percent mortgages makes about as much sense as a ban on riding your horse and carriage down Regent Street. Or a ban on taking your spear onto an aeroplane. Since there aren’t any on the market, and no one had any intention of launching any, it isn’t going to make much difference.

The same is true of a ban on bonuses or caps on bankers pay. The way that banks do business has changed fundamentally over the past year, and is going to carry on changing over the next twelve months. The days of trading their own books like a giant hedge fund, or rewarding dealers with “heads-I-win-tails-you lose” bonuses are over. Just look at the way the Swiss giant UBS has introduced the ‘malus’ – a bonus that gets awarded in one year, then gets taken away in the next if your unit doesn’t carry on making profits.

Everyone in banking is well aware that they have created a system with lopsided rewards and woefully inadequate risk controls. Heads have already rolled, boards have been humbled, and shareholders have demanded new strategies. Banking is going to be a dull, conservative industry for the next decade: think the water industry, but without the excitement. Those kinds of jobs pay dull conservative salaries.

The same is true of calls for more regulation of hedge funds. You’ve more chance of raising money for the Fred Goodwin memorial statue in Edinburgh than you have of raising funds for a hedge fund right now. They are closing faster than Icelandic BMW dealerships. What is there going to be to regulate exactly?

Politicians love to fight the last crisis just the way generals feel comfortable fighting the last war. After the dot com collapse, we took it out on auditors and analysts for not keeping a tighter eye on all those flimsy companies. Arthur Andersen went out of business. But the next time around, it wasn’t the auditors or the analysts who fell down the job. The problems were elsewhere.

Three years ago, when Brown was Chancellor, it would have been a great idea to clamp down on 100 percent mortgages. Even a warning about house prices would have been good. Yet Brown remained silent.

A ban now, alongside clampdowns on bankers pay, and regulations on hedge funds, is simply irrelevant. It is just mood music, designed to make politicians look busy and decisive.

In time, there will be another bubble, probably caused by the frantic printing of money designed to tackle this one. But the politicians and regulators will be so busy kicking around the ash and embers from the last fire, they won’t notice the new one starting next door.