Leading article: Keeping credit where it is due

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The Independent Online

No one disputes that mortgage lending got out of hand in recent years. The abuses might not have been on the scale seen in the American sub-prime housing sector, but the UK market was still rife with dubious practices.

Loose lending helped to pump up a housing bubble. And the economic consequences of the bursting of that bubble have been disastrous. Banks have collapsed and the state has been forced to step in to rescue them. Tens of thousands of homes have been repossessed. Late entrants to the housing market have been plunged into negative equity.

The Financial Services Authority is expected to unveil new rules today to stamp out malign lending practices. Banking lobby groups argue that new regulation is unnecessary because they are already being much more careful about whom they lend to. We need not take such pleading from a largely discredited industry seriously. But it is, nevertheless, important that new regulation does not end up harming the very individuals it is supposed to protect.

There is a strong case for restricting loans made without proof of income and mortgages for buy-to-let property speculation. The defaults on these loans are now running at much higher levels than conventional home loans. But if the new controls on lending are too strict there is a danger of harming sound customers. For instance, crude limits on loan-to-value loan sizes risk penalising those who have a steady income but relatively little capital. It is a tightrope for the FSA. But there are three principles which ought to guide the regulator as it walks it. First, it should not try to second guess every decision made by the banks. Second, it should be ruthless in ensuring that banks make prudent lending decisions based on detailed knowledge of their customers' circumstances.

Finally the regulator needs to make banks understand that it will be their managements and shareholders that bear the full costs if the loans they make turn bad; in other words, that there will be no socialisation of losses in the event of another housing bust. It would be vain to imagine that regulation can prevent the recurrence of future bubbles, but if the FSA sticks to these principles it ought to be able to make the property lending market considerably safer for all involved.

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