My Lords, in 2004 the Government extended the scope of Financial Services Authority regulation to residential mortgages. The Government have asked the FSA to look at how new mortgages should be treated where the value of the loan exceeds the value of the property. The FSA has stated that it will publish a paper in September on mortgage regulation which will consider product regulation including maximum loan-to-value and loan-to-income caps.
My Lords, I am grateful to my noble friend. When I bought my house many years ago my mortgage was 70 per cent of the value and two and half times my salary, with my employer certifying that that was the case. Does my noble friend agree that if that had stayed the practice of the mortgage lenders, we would not have had to face most of the difficulties that we now face?
My Lords, I agree that building societies and banks that advanced high loan-to-value ratio loans or high loan-to-income ratio loans have experienced above average default ratios. However, there are also other areas of difficulty around self-certified loans, the acquisition of mortgage books of loans and the buy-to-let area. Banks will need to learn a number of lessons in how they approach the financing of home ownership.
My Lords, does the noble Lord agree that one of the main problems with sub-prime mortgages in the United States was the fact that the valuations themselves were fraudulent? Even in this country brokers have been known to press mortgages on to people who are in receipt of unemployment benefit.
My Lords, I have read reports about valuation approaches in the United States of America. Some of those issues may well have occurred here and they are receiving the attention of the regulatory and prosecuting authorities.
My Lords, my noble friend told us some time ago that even the banks we control will be treated on an arm's-length basis. How does that fit in with what he is telling us now? For example, the banks were lending on commercial terms to unsuitable borrowers when house prices were very high. Now they are apparently going to be lending 90 per cent or even 100 per cent on houses whose prices are quite a bit lower. But presumably those loans will go only to suitable borrowers. Are the Government going to intervene?
My Lords, the question of suitability, regardless of whether it applies to banks in which the Government have a temporary shareholding or to other banks, must be a matter for determination by the boards and management of those banks together with the regulators. The FSA's mortgage-regulation regime requires firms to lend responsibly; to satisfy themselves that borrowers have the ability to repay their mortgage; and to ensure that borrowers have full information about the products they are considering purchasing. That applies to banks regardless of whether the Government have a shareholding.
My Lords, I am sure that the whole nation will be grateful that the FSA will produce a paper on this issue in September. However, does that not reflect an alarming lack of urgency? Can the Minister give any good reason why new mortgages should amount to more than 85 per cent of the value of the house? If he cannot, will he instruct the FSA to incorporate that into its guidance before September?
My Lords, the noble Lord, Lord Newby, raises a number of questions. I think that the lack of urgency is due to some extent to the fact that this particular horse has bolted. The proportion of loans being extended for more than 90 per cent of the value is now very low and a very high proportion of those loans are to borrowers with existing loans who are rolling the loans over or taking them from one mortgage provider to another. To some extent there is an enforced demand in place. That is an example of where the value of the property is quite close to the loan value but the loan is nevertheless required as a force of necessity.
There are other circumstances that would discourage one from being prescriptive. For instance, a loan-to-value ratio could be high but there could be a third-party guarantee; or there could be a low multiple of earnings with a high degree of confidence and conviction about those earnings. So I think that we need to be slightly careful about broad-brush generalisations. However, market practice has certainly seen a significant reduction in the availability of high loan-to-value mortgages.
My Lords, the basic rules and principles of sound lending should apply to housing associations, councils, building societies and banks. If they do not, shareholders, depositors and taxpayers are placed at risk. Reckless lending applies to the nature of the loan rather than the identity of the lender.
My Lords, will controlling mortgage lending in the way suggested by the noble Lord, Lord Dubs, stop households overgearing or will it simply drive them to more costly and more onerous forms of financing?
My Lords, I think that it will be a force for more prudent behaviour. The sources of non-institutionalised lending really are quite limited now. For instance, the fact that banks are no longer securitising loans and selling them on, but rather retaining ownership of a higher proportion of their loans, with the responsibility that goes with that, is a force for more prudent and conservative lending.
My Lords, first, it is important to note that we are now in an environment of very low interest rates. Those low interest rates have been passed on to mortgage borrowers, so the cost of debt service has declined. However, unfortunately, there are people who are experiencing difficulties. That is why I am delighted to see that, this morning, my right honourable friend the Minister for Housing introduced and announced the details of the homeowner mortgage support scheme, with very substantial support from our major lenders. It will do much to ease the problems and difficulties of those who find themselves with a temporary difficulty in servicing their mortgage, although that must always be subject to independent advice. We do not want to see people accumulating even larger liabilities, which they will have even more difficulty in servicing in the future.