Lenders turn on 100% mortgages backlash

Wednesday, 25 February 2009 10:44 AM

Lenders have turned against calls for a ban on 100 per cent mortgages, warning against a backlash that could create more problems.

Gordon Brown has called for more controls on 100 per cent mortgages.

At the weekend, the prime minister wrote in the Observer: "We have got to get the balance right between serving homeowners better and encouraging responsibility in the housing market.

"This is a duty on banks and building societies, but we have also asked the Financial Services Authority to look at how in the future we should control new mortgages for more than 100 per cent of house value."

Mortgages offering 100 per cent or more of the value of a property have been heavily criticised since the economic crisis broke, as first-time buyers have found themselves in negative equity.

Northern Rock's Together mortgages offering up to 125 per cent loan-to-value (LTV) are now being characterised as what was wrong with property market. Northern Rock reports its Together mortgage customers are now seeing higher levels of arrears and repossession.

However, the Council of Mortgage Lenders (CML) is calling into question how this would be possible or if it the right thing to do is to ban 100 per cent LTV deals.

"We need to look at the system of regulation holistically. Now is not the right time for an instant backlash," said a CML spokesperson.

She also warned of banning individual products - which could hit borrowers that do need them.

The CML also points out 100 per cent mortgages are necessary for struggling homeowners now facing negative equity and a number of the government's own share-equity homebuyer schemes.

The body also warned banning high level LTV mortgages could also result in borrowers circumventing restrictions by "topping up" with more expensive, unregulated second mortgages or unsecured borrowing.

"It is absolutely a serious danger, especially people who are vulnerable might do," said the CML spokesperson said.

The CML also called for government and regulators to consider how these issues should be dealt with in the longer term.

"Is lending at 100 per cent irresponsible if it is affordable for the borrower? And are borrowers acting irresponsibly without saving for a deposit first?" the CML asked.

"Clearly, the more you borrow - and the less equity you have - the more difficult it is to weather even a temporary loss of income. But is high LTV lending always 'bad,' even in current market conditions?"

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