Some people might be somewhat confused lately by the whole banking and lending situation, and I have to say I completely understand why. We have seen billions upon billions pumped into the banking system and for some reason we still have a situation where it appears lenders don’t want to lend money so people can’t buy property or develop what they have or even get extra borrowing to spend on the high street.
In addition we have seen drops in interest rates to levels we have basically never seen before. Yet all this effort into trying to get lenders lending and us the consumer borrowing and ultimately spending our money has failed, Why?
The answer comes as no huge surprise really. Due to the fact that lending establishments are currently unsure of their assets leading them to be very unsure of their liabilities has caused them to plunge into somewhat of a crisis.
It is also their uncertainty in assessing whether the money they lend will be a good investment or not creating assets or liability respectively. All this indecisiveness has caused the current lull resulting in lending establishments being disinclined to lend.
It is an easy mistake to think this is the only reason why banks do not want to lend and that they are clueless as to where they actually stand. However, the full story is more likely that they have frankly come to the conclusion they cannot carry on doing business in the same way as they did before. Or in other words they have had a up to date reality check. For the past several years, their lending has been surplus of 95% with many borrowers being allowed to borrow on a self certification basis.
Basically, these actions have caused them to be unwilling to lend in this fashion as it has led to their business being exceptionally risky. This is further problematic for them due to difficulties in locating non risky clients who can show full proof of income and with a low loan to value mortgage, all because of their habit of past high lending. Now they have woken up to this has left them averse to further lending in this fashion.
So banks may have the money to lend to you and I, interest rates may indeed be at such a favourable level for us to go out and “fill our boots” for want of a better expression. But can you actually find a lender willing to lend you 90% to 95% or 80% on a self cert basis? I have to be honest I don’t think so.
What does this all mean? I personally think that it may be a good few years before the market for mortgages comes back and that is if it comes back at all. We might have seen an end to the way we used to mortgage our properties. No more self certification and no more high loan to values. The problem is house price inflation over the last five years or so has been fuelled by the ease of these mortgages. We probably should have been unable to get a large proportion of the mortgages we have. So the future could be about waiting till our wages and deposits get up to the levels that house prices actually are, or wait for the property to come down, now that is a scary thought indeed.
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