NickGulliford

10 Stupid Moves That Created This Mess

The truth about the causes of the financial crisis in the UK is leaking out
slowly. There is still some way to go.

The government said initially:

1. The crisis arose because of sub-prime lending in the US

2. Northern Rock's loan book was fine, but its dependence on
wholesale borrowing was at fault

Subsequently, it has emerged Northern Rock's Together mortgage [1]
was by no means the only bad lending occurring, so that the first
part of [2] was simply not correct.

Speaking at this year’s Council of Mortgage Lender’s annual
conference in London on Tuesday 2nd December, Vince Cable said,
“the admission came after a dinner two years ago from the chief
executive of one of the banks which is now part-nationalised.”

He said: “I had dinner with a chief executive of one of the now
recently part-nationalised banks and we argued for an hour about
his lending practices. Finally he accepted his bank’s lending was
foolish and dangerous, but he would have been sacked by his board
if he didn’t lend these mortgages.”

Cable told delegates that mortgage lenders were not the only ones
to blame for the current financial turmoil.

He said: “It is easy to point fingers, but the political class are
just as responsible for the situation. It has pursued irrational
owner-occupier aspirations with ridiculous religious fervour and
now the dream has burst very painfully.”

What we need to know is in what respect was the lending of the
banks 'foolish and dangerous'?

If the CEO of a large bank was aware of it two years ago, who else
knew?

On Wednesday 26th November 2008, in a debate in the House of Lords,
Lord Myners [Parliamentary Secretary, HM Treasury] said,
"foreclosures are higher in Northern Rock than in other mortgage
lenders because its lending was more irresponsible. It is as simple
as that."

Lord Turner, the FSA Chairman, had previously told the Treasury
Committee of the House of Commons on Monday 3rd November 2008 that, "looking at the average figures at that time, whether it was loan
to value ratios or whether it was the arrears' experience then
being experienced, you would not necessarily have seen Northern
Rock as an outlier in terms of quality of mortgages."

This seems to be the opposite of what Lord Myners is now saying.

Lord Myners is the first member of the government to admit that
there was an inherent weakness in the Northern Rock loan book,
though the description 'irresponsible' does not explain what the
weakness was.

The Council of Mortgage Lenders Housing Finance Issue [November
2005 "Trends in mortgage borrowers' repayment difficulties"]
explains, 'Married households tend to have the lowest incidence of
repayment difficulties, whereas divorce and separation tend to
increase mortgage repayment problems.'

Earlier research has suggested, 'You're more likely to get into
serious debt because your relationship fails than by
overspending........ A survey by Alliance & Leicester [in 2006]
show[ed] that people who are divorced or separated owe twice as
much as married people. A typical couple owes £5,200 on loans and
credit cards between them - an average £2,600 apiece - while
divorcees owe £5,000 each and the separated £6,300......... A [firm
of] insolvency practitioners ..... found that 30 per cent of people
with debt problems blamed divorce or relationship breakdown."

The financial crisis, both here in the UK and in the US, may well
have been triggered by excessive lending to cohabiting couples
whose relationships are significantly less stable than those of
married couples. The easy credit was a contributory factor, but
'irresponsible' lending which was 'foolish and dangerous' to the
increasing number of couples with unstable relationships was
probably the prime cause.

What is becoming clearer is that the crisis is not just a 'sub
prime' problem emanating from the US – as the government claimed at
first - nor is it caused in the UK simply by over dependence by
Northern Rock on the wholesale money market, nor is primarily the
result of the creation of sophisticated but unstable financial
instruments which have increased the availability of credit.

Since the taxpayer owns Northern Rock and the Bradford and Bingley,
and now has a majority holding in RBS, surely it is only reasonable
that these banks should reveal the marital status of those in
arrears with their mortgage payments?

If we are going to understand the real nature of the crisis, the
full facts should be published, not just a misleading subset of
them.

The Home Ownership Bubble

Do we know the marital status of those in arrears with mortgage payments?The bubble has been created at the same time as the massive increase in cohabitation. The duration of a cohabiting relationship is likely to be much briefer than a marriage, so my guess is that we won't learn from this experiment until the facts are more fully known. We do, however, know a number of things, such as that parents are less likely to support financially offspring in cohabiting relationships.

Bailouts: The Moral Imbalance

I can't fault the logic of "the government is bailing out the most irresponsible offenders who put themselves and the economy at the worst risk".

But what about the marital status of those in arrears with their mortgages?

All the evidence I have looked at suggests that cohabiting couples are much more likely to be defaulters than married couples.

If it turns out to be the case that it is the recent and rapid increase in cohabitation which has generated the "irresponsible offenders who put themselves and the economy at the worst risk", what will we say then about the "moral relativism of our collective national view of tragedy and obligation"?

Lax Underwriting , Foreclosures, and Credit Crunch Stimulate Misery Industries

What I'd like to see - and maybe you know where the answer can be found - is the percentage of mortgages taken out by cohabiting couples and the percentage of those in arrears by marital status.

My guess is that cohabiting couples are disproportionately represented among those in arrears and may very possibly be the main trigger of the crisis.

The New York Times Attack on Freddie Mac's Richard Syron

Good article! The Boston Globe defended Syron:

www.boston.com/busines...

"Syron encouraged the Boston Fed's research department to wade into important, but contentious public policy issues. Perhaps best known was its study of lending discrimination, which found race, not lending risks, driving loan decisions.......... the study helped change lending practices and expand credit to minority and poor neighborhoods. In taking on the issue ......... Syron was virtually alone in the financial industry."

That was clearly commendable. People should not be discriminated against on the grounds of race or neighbourhood. However, lenders need to assess the integrity of borrowers as well as their earnings or other income.

I have raised another issue in an article "Are the Sub-Prime, Northern Rock, Fannie Mae and Freddie Mac fiascos connected with the increase in cohabitation?"

I think we need to know whether the foreclosures are disproportionately against cohabiting couples - as compared with - married ones?

The parties who have the information that would enable an answer to be give to this question seem to be very reluctant to provide it.

Members of the public on both sides of the Atlantic will all agree with Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC), “The signal that we send to our banks is that we want to continue lending. But we want healthy lending. We want good risk management. We want well underwritten loans to credit-worthy borrowers.”

In "Soaring cohabitation risky?" Mike McManus writes:

washingtontimes.com/ne.../

"Some 6.4 million couples were cohabiting at any moment in 2007, but only 2.2 million married, 700,000 of whom were not cohabiting. Cohabitors had a 23 percent chance of marriage. Grim odds .......... Many couples who cohabit say they are in a "trial marriage." That is a myth. More than 8 in 10 will break up either before or after the wedding,"

The survival rate of first time marriages for couples who did not cohabit first is more than twice as good as for couples who cohabit.

I don't know whether mortgage underwriters take these facts into account, but I think for the same reason that race and neighbourhood should not be used to discriminate against people applying for mortgages, the risk associated with a lack of marital commitment should be assessed in the light of proper research, if that is not being done at present.

This is "a contentious public policy issue", but I don't think the banks, the media and the politicians can continue to ignore it.

California Signaling A Housing Bottom? [Housing Tracker]

"Freddie Mac's 0.86% single-family delinquency rate is a fraction of the most recent national single-family delinquency rate (6.35%) calculated by the Mortgage Bankers Association of America."

However, a so far unanswered question is "to what extent did the increase in cohabitation precipitate this crisis"?