Government Action in Mortgage Market

The collapse in mortgage lending is becoming a real concern. Next year, the association of British Bankers predict net mortgage lending could be negative. Despite lower interest rates, it is still as difficult as ever to get a mortgage. As a result, housing sales are at their lowest level on record.

When the government suggested banks should return to 2007, lending levels there was many raised eyebrows. Surely there is no sense in returning to lending levels that caused the housing boom in the first place?

However, the mortgage market has become so constrained that it now appears there is a case for government intervention to overcome the almost paralysis which afflicts the market. We are not suggesting we want a return to interest only, 100% mortgages - far from it. But, the banks have gone from one extreme to another. From freely offering mortgages, they are now being very conservative.

You could argue there is good reason to be conservative. Banks will correctly point out we are facing:

• Rising repossessions,
• Economic recession and rising unemployment
• falling house prices creating negative equity.
• Banks need to improve their balance sheets after years of over lending.

With these factors in mind, it is hardly surprising that banks are being more cautious in their lending. But, if the mortgage industry faces continued constraints we could see a market devoid of buyers; this will cause more problems. It also must be remembered that with low interest rates and falling house prices, the cost of mortgage repayments has fallen significantly. Although repossessions are rising they are still  less than 1% of total mortgage loans. It is not that the government should try to stop house prices falling or return to 2007 lending. But, the market is showing signs of market failure, with banks wanting to retreat into  a shell. Therefore, there is a case for governments offering some temporary incentives for mortgage lending, and more than just a stamp duty cut.