100% mortgages were 'foolish' says minister

23 February 2009 / by Rachael Stiles
Financial Services Secretary Lord Paul Myners has denounced the 100 per cent mortgage, saying that it was "foolish" for banks to offer them.

While he did not say that the 100 per cent mortgage should be banished forever, Lord Meyners told the BBC1 Politics Show that "With hindsight, it is generally recognised in the banking community that [100% mortgages] was a foolish thing to do."

"There was an exuberance that we need to address." he said. "We have learned some very, very expensive lessons globally about reckless, feckless, witless lending by a small number of banks."

The Prime Minister Gordon Brown has suggested that the Financial Services Authority could start imposing restrictions on loans of more than 100 per cent of a property's value.

As part of its initiative to ease pressure in the money markets, the Government has been demanding that banks increase the amount they lend, but, writing in the Observer, Mr Brown said there must also be more of a balance between "serving home owners better and encouraging responsibility in the housing market."

"This is a duty on banks and building societies," he wrote, "but we have also asked the Financial Services Authority to look at how in the future we should control new mortgages for more than 100% of house value."

The impact of the credit crunch on the UK's lending capacity – both from domestic and foreign banks – has become a "central problem" for the UK economy, Mr Brown said. Of the future of the British banking system, he urged:

"We need to ensure that the UK banking system that emerges over the coming months is refocused on providing strong competitive banking for domestically focused businesses, including start-ups and entrepreneurs, as well as mortgages for those who want to buy a home. In short, we need stronger business banks, mortgage banks and savings banks."

Alistair Darling has also suggested that the end is nigh for the 100 per cent mortgage. Speaking on the BBC's Today Programme, he said that as a result of 100 per cent mortgages, "Northern Rock had their fingers badly burned and more importantly so did many of their customers".

While Northern Rock mortgage lending is set to rise, including offering mortgages of up to 90 per cent loan to value, the nationalised bank will not be allowed to offer 100 per cent mortgages, he confirmed.

The Chancellor said that such loans were "ridiculous" and added that he previously had "severe doubts" about them.

The Council of Mortgage Lenders said of the recent negativity surrounding 100 per cent mortgages, that there are "side issues to consider that should not get lost, despite the inherent appeal of a simple policy such as this to mitigate risk and encourage responsible borrowing."

For those who borrowed 100 per cent of more of their home's value, negative equity poses a great risk to those who are unable to secure a mortgage as big as the amount they borrowed, it said.

"What about shared equity loans made to the affordable housing sector, where borrowers are not asked to pay a deposit?" it asked. "And what about the fact that people may simply "top up" their borrowing with second mortgages or other unsecured loans on more expensive terms? These issues all need to be considered in deciding the right regulatory approach to 100%+ mortgages in the future."

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