In the last edition I left you, dear Reader, in a state of suspense, having just mentioned the infamous Northern Rock Building Society. Twelve years, or so, ago, we lived in a world of readily available finance, at broadly average interest rates, with little restriction on the level of borrowing. World economies were doing well, and property values were increasing steadily, resulting in a general feeling of prosperity for the majority. Unemployment had halved since the previous peak in 1993, and GDP data (the basic measurement of how the UK is performing economically) had been showing a steadily increasing economy over the same period. 100% mortgages, which had once been the stuff of dreams, were commonplace and, as I wrote in Part 1 of this column, Northern Rock would lend up to 125% of the value of the property; they were not alone. Under the right set of circumstances, this was not necessarily a bad thing. I arranged several mortgages at that time for clients purchasing properties that were in dire need of some tender, loving care, the excess over the purchase price funding the costs of the works; the end result being that the value of the property increased, a little more than somewhat. Alas, things were about to change.

Across the Atlantic Ocean, a similar situation was occurring. It is often said that in the USA, everything is bigger and better. Well, in this case, it was certainly bigger! Some of the US financial institutions had taken profligate lending to new heights. I remember one commentator saying that, “American Banks would give an unemployed hillbilly a 150% mortgage on a log cabin.” Whilst that may have been somewhat of an exaggeration, not only had lenders reduced financial underwriting to an absolute minimum, but they were also bundling up (or ‘securitising’) packages of loans and selling them on to investors with the backing of Credit Referencing Agencies, that had (erroneously, we now know) given them a AAA rating for their credit-worthiness. Huge bundles were sold on, and subsequently split into smaller and smaller packages, with all the participants taking a little profit on the way. Financial instruments were manufactured and distributed widely. I won’t go into the concept of financial derivatives, but suffice to say they tend to magnify both the profits and losses of the investments to which they are linked. Huge amounts of money were tied up in such instruments and based on the inflated values of properties that were mortgaged up to the hilt.

When a major financial institution decided not to deal with Hedge Funds that specialised in US mortgage debt, the house of cards started to fall. Lehman Brothers was the first real casualty, although the US Government had stepped in to bail out investment bank Bear Stearns. Casualties followed around the Western World, with the bailout of Northern Rock being the first rescue in the UK, with many more ‘arrangements’ to follow, mostly arranged by the UK Government, gently persuading institutions to take over some failing competitors.
Mortgage lending criteria became much more strict and it was considerably more difficult for ordinary people to get the home finance that they needed. Since then, things have slowly improved for the mortgage borrower. Gradually, more common sense has returned to the market. Within reason there is still a little way to go before the average British member of public is deemed by financial regulators to be responsible enough to borrow the funds they need in order to purchase their own homes – without an inheritance, medium-sized lottery win, or years of saving to pay their deposit. Things have changed somewhat in the last ten years or so and will continue to do so. That’s just how it is!

Enough, enough, I hear you say (and with good reason, I say). Until next time, have a joyous and peaceful Christmas and a wonderful New Year.

David Foot