I have moved these from the other thread, as they were not directly relevant. Brendan
This proposal of 80% LTV is being put forward as a panacea to cover the potential for a further house pricing bubble and to avoid prospective home owners becoming over-borrowed. In my view it is an extremely blunt instrument and to a large extent will serve only a minimal contribution towards the above objectives. My commentary as a long standing banking credit analyst with in-depth experience of both the recent crisis and the mid 80's crisis is as follows:
1. LTV limits have no direct relationship with repayment capacity. The primary safeguard in making a lending decision is ability to repay. This is based on a full analysis of income/outgoings and specifically sustainability of income source. Repayments are generally stressed at a 2/3% margin to account for increases in interest rates. This must be specific to clients as income multiples etc are not appropriate.
2. Having a 20% deposit does not relate to affordability unless it is based on a savings record over a term. However even in such a scenario a savings record can give a distorted result. If my partner and I are 2 single people living with parents who contribute nothing to rent/food etc then we will have a good capacity tio build up a lump sum to meet a 20% deposit over time. However if we don't have generous parents we may be living in a rented property and the same funds are being used to meet our rent and other expenses. In scerario A we will be regarded as good mortgage applicants. However in scenario B we will not meet the requirements. In both scenarios our net incomes are likely to be the same after purchasing the property.
3. I accept that MII is not without risk. However in the US and some other countries it has tended to work, provided proper regulation is applied to the underwriting company. Remember that MII will only cover a 10% reduction in property price in the event that the market falls. neither MII nor 80% LTV would have made much difference to the market drop that was encountered from 2008. The core issues were related to loan affordability and a >50% drop in market value. What would have worked far more appropriately was a higher level of due dilegence applied to individual repayment capacity. A housing bubble on its own, could have been managed without the disasterous consequences we have seen. However a housing bubble, coupled with a global economic slump and consequent loss of jobs/income resulted in the debt Tsunami we have experienced.
We are now closing stable doors after horses have bolted. Yes I agree that we have new horses to look after and banks need to be properly regulated to ensure they apply a proper level of diligence to all new lending. However, LTV limits will not achieve this and as an end result will continue to reward those with generous parents etc and punish those who are caught up in the high rental market with no equivalent ability to save for a 20% deposit. Lets not be myopic in our approach to this issue and start thinking about affordable lending rather than security ratios!!!
This proposal of 80% LTV is being put forward as a panacea to cover the potential for a further house pricing bubble and to avoid prospective home owners becoming over-borrowed. In my view it is an extremely blunt instrument and to a large extent will serve only a minimal contribution towards the above objectives. My commentary as a long standing banking credit analyst with in-depth experience of both the recent crisis and the mid 80's crisis is as follows:
1. LTV limits have no direct relationship with repayment capacity. The primary safeguard in making a lending decision is ability to repay. This is based on a full analysis of income/outgoings and specifically sustainability of income source. Repayments are generally stressed at a 2/3% margin to account for increases in interest rates. This must be specific to clients as income multiples etc are not appropriate.
2. Having a 20% deposit does not relate to affordability unless it is based on a savings record over a term. However even in such a scenario a savings record can give a distorted result. If my partner and I are 2 single people living with parents who contribute nothing to rent/food etc then we will have a good capacity tio build up a lump sum to meet a 20% deposit over time. However if we don't have generous parents we may be living in a rented property and the same funds are being used to meet our rent and other expenses. In scerario A we will be regarded as good mortgage applicants. However in scenario B we will not meet the requirements. In both scenarios our net incomes are likely to be the same after purchasing the property.
3. I accept that MII is not without risk. However in the US and some other countries it has tended to work, provided proper regulation is applied to the underwriting company. Remember that MII will only cover a 10% reduction in property price in the event that the market falls. neither MII nor 80% LTV would have made much difference to the market drop that was encountered from 2008. The core issues were related to loan affordability and a >50% drop in market value. What would have worked far more appropriately was a higher level of due dilegence applied to individual repayment capacity. A housing bubble on its own, could have been managed without the disasterous consequences we have seen. However a housing bubble, coupled with a global economic slump and consequent loss of jobs/income resulted in the debt Tsunami we have experienced.
We are now closing stable doors after horses have bolted. Yes I agree that we have new horses to look after and banks need to be properly regulated to ensure they apply a proper level of diligence to all new lending. However, LTV limits will not achieve this and as an end result will continue to reward those with generous parents etc and punish those who are caught up in the high rental market with no equivalent ability to save for a 20% deposit. Lets not be myopic in our approach to this issue and start thinking about affordable lending rather than security ratios!!!
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Perhaps I'm too long in the banking business!