Bad borrowing is as bad as bad lending
Instead of shackling lenders, the reform of the mortgage market should concentrate on regulating borrowers. They were just as greedy and ignorant but liable to lose much more than the banks.
The Financial Services Authority is right to identify the excesses of the housing market as a root cause of the financial crisis. Without sub-prime mortgages to slice and dice, the investment banks would not have had the derivatives and securitised debt to trade. But without the eager borrowers, there would have been no bubble to burst.
However, there is little wrong with a bank giving a 125 per cent mortgage that is five-times the income the borrower has lied about anyway so long as the other 999 loans provided by the bank that week are sensible. Even when that lax loan goes wrong, the bank will survive. But for the borrower, that property purchase involves his total wealth and future income and when he falls into negative equity, he loses everything, whereas the bank’s loss was negligible.
So if its objective is financial stability, the FSA shouldn’t be regulating particular products; it should be ensuring that the bank is safe, which means controlling the quantity of bad products on its loan book. Buy-to-let loans in themselves are not bad, for instance, but when they comprised most of the business at Bradford & Bingley they brought down the bank.
But if the FSA is interested in consumer protection rather than bank protection or protecting the financial system, then barring some individuals from taking on risky loans ought to be on its agenda. That doesn’t mean banning risky loans however; those who can bear the risk should be allowed to continue borrowing if a lender is willing to lend.
The FSA reforms do include better education for the public, but the onus is still put on the lender not to lend rather than the borrower not to borrow. The state bailed out lenders and their depositors of course; it will not rescue those individuals who took on more risk than they should.
