You may think it was the housing bubble and reckless lending in the British domestic mortgage market that were mainly to blame for our present financial crisis. Media stories of 125 per cent loan-to-value mortgages and self-certification of income by borrowers all reinforced this impression, leading to calls for tighter regulation of mortgage lending.
In fact, the supposed housing bubble and “reckless” lending had absolutely nothing to do with the financial crisis in this country. Here’s why. First, the number of British mortgages in arrears as a proportion of all mortgages was lower in 2009 than in most years in the 1990s. Annual repossessions in Britain remain less than 0.5 per cent of outstanding mortgages. Repossession rates in the US tend to be around three or four times higher, suggesting that the American housing market has been vastly more problematic.
This picture of fragility in the US mortgage market and robustness in the British market is reflected in the pattern of losses in this country’s banking system. Thus, by as early as mid-2008, losses in British banks on securities tied to US subprime and other mortgages, as well as other leveraged loan commitments, were around $65bn. By contrast, British banks’ cumulated write-offs and other revaluations of loans secured on domestic housing over 2008 and 2009 was a mere £1.46bn out of a total mortgage loan book of around £924bn. Over the same period, equivalent losses on credit cards were over £7bn. These figures make it absolutely clear that lending by British banks in the domestic market was far from reckless and that the source of this country’s financial collapse was the US mortgage market. In particular, silly investments by British banks in securities backed by US subprime mortgages was the fundamental problem. This was exacerbated by poor quality lending on credit cards and commercial property.
So when it comes to imposing new regulations on the British banking system, reforming the domestic mortgage market should come extremely low down on the list of politicians’ priorities.