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Bank of England
Monetary Policy Committee
High LTV Mortgages
The media has been packed with banker bashing for quite some time now, most of it surrounding bonuses and how unfair bankers' pay deals are at a time when the economy is struggling and several banks have had to be bailed out with taxpayers' funds.
To be honest – I personally don't have too much of a problem if a banker is able to cut a pay deal that happens to pay him an enormous pay check regardless of the economy – well done for getting that into your contract. Some people will always earn more than others, and some will thinks it's unfair – that's life, it happens, get used to it. If you don't like it the alternatives are limited to pretty much just Utopia or Communism.
What gets my goat is when people get paid an exorbitant amount of cash for doing nothing more than consistently and repeatedly making bad guesses about something they clearly have no idea about – even though they should, and then compounding it further by proving several years later in the same job that they STILL haven't learned anything about the same subject.
It's one thing in the day to day workplace – a lot of companies have their very own office half-wit that seems to trundle on at the company for years on end, even though no-one can quite figure out what they do or why they are there. When the workplace happens to be the Bank of England though, it's a bit more of a concern.
Hence this post. A post in which I will prove that one of the top men in banking in the UK has no idea on how the housing market works. A man that is responsible for advising the government on mortgage lending policies and yet has repeatedly made outlandish statements to the press, the government, and is still employed at the Bank of England.
Who is this man?
Well, he is Professor David Miles – Monetary Policy Committee Member at the Bank of England, Visiting Professor at Imperial College, ex Chief UK Economist at Morgan Stanley and apparently one of the UK's top money boffins.
Why has he got my goat?
Statement One: "The worst of the housing market crash is now over" July 2009
Statement Two: "House prices to rise for years" March 2012
The real corker has to be this though:
Statement Three: "It probably never made sense for there to be 100pc mortgages. There may be no price at which it makes commercial sense for such a loan to be available." March 2012
Bear in mind the Prof has been hired in the past to advise on policies affecting lending and housing. In 2003 the then Chancellor Gordon Brown commissioned Miles to look into long-term fixed rate mortgages because Brown believed the yo-yoing of house prices in the property market was damaging the economy (and selling off the UK's gold for two jelly babies and an action man figure wasn't? eh Gordon?) .
Whether Brown was right or not in his thoughts at the time – Miles' research would appear to have done nothing much other than report what the banks wanted to hear – that long term fixed rates weren't popular with the public because they didn't understand them (one would assume because the spotty oik at the bank flogging mortgages didn't understand them either) and, because such mortgages would require more capital to be held by the bank to cover wavering base rates.
It wasn't in the interest of the banks to be selling them (only one lender offered a 25 year fixed, and out of 60,000 clients, only 200 had taken one).
The research itself was not exactly ground-breaking either; at the time the Dutch and the Spanish had long been providing long-term fixed rate mortgages and still had volatile property values, so in essence it was already known that the research would be unlikely to yield anything new at all.
What did come up in the research though that appears to have been somewhat glossed over at the time is that "the market was intensely competitive and there is no suggestion of the companies colluding to maintain the pricing environment". A very defensive statement given the subject at hand, almost implying that there was, but just saying there wasn't to make sure it wasn't looked into any further.
Banking is a competitive industry – no doubt about that - what has to be considered however is that it is a necessity in this day and age. Not just for mortgages, but anything one does in day to day life.
When competition arises in business, the marketing world fires into action. Much brainstorming takes place to figure out who is going to outwit who and how best to grab the market share. To start with, this is done through advertising.
A modern day example of this is illustrated very easily – what product do you think of if I ask what these innocuous things have in common?
We all know it's insurance – had I asked the same question 10 years ago even the best philosophers would have had a problem making any kind of connection between the two.
In banking though, advertising with novelties and annoyance is frowned upon. What tends to happen is it all comes down to perceived value, and in more recent times, service, such as having their call centres in the same country and opening on Saturdays.
Given the fact that banks are always trying to gain business from each other, stating that the sector is competitive is pretty obvious. Whilst proving collusion would be tough at the best of times and tantamount to suggesting that cartels were/are rife – the fact is due to the lack of long term fixed rate mortgage products on the market, as well as a serious lack of providers. The product itself doesn't make enough money for the banks.
Think about it for a moment. In the UK there are various standards that exist for all kinds of things. If you import or manufacture a bicycle, and it doesn't comply with BS6102, it is an offence to sell that product. The fact that you can by a similar bicycle in China for a fraction of the cost of the same thing in Europe is beside the point – without making it compliant with the standard – it's illegal to sell it because the law says so.
In banking the law would appear to be a bit vaguer – there are a few laws that say bankers and lenders must tell a borrower that costs could go up or down and ask them if they understand. The law doesn't make the lender take any responsibility for lending out the money though.
A mortgage provider is doing nothing wrong by saying to a client "well house prices have gone up for the past 5 years – no reason why that won't continue is there?" or "Buy to Let mortgage on that house? Of course – local stats tell us you should get X pounds per month so I'll give you a mortgage for Y" (bear in mind how manipulated bank and mortgage based house price stats are anyway).
Loans are decided off the back of arbitrary values that are dreamed up with no real science behind them – a quick look at average house price indices from the major banks illustrates that to perfection. All the banks are interested in is making sure they are lending you money and getting the fee – it doesn't matter that they don't know if you can pay it back or not, or whether the property is even worth what they are lending to you. Fat fees upfront – that's what matters.
Back to the main point here though...
Given how embedded in the banking industry Professor David Miles is and has been over the years, how is it even possible to make such grossly inaccurate statements, some of which have taken him years to admit/realise?
With all the research carried out by him as early as 2003 you would think he might have noticed that high loan to value lending was not a good idea (one would think high LTV lending doesn't make sense to anyone except loan sharks and the mafia).
The fact that it has taken a man in this position and with this level of education from 2003 to 2012 to realise "It probably never made sense for there to be 100pc mortgages. There may be no price at which it makes commercial sense for such a loan to be available" is simply astonishing.
Professor Miles. Your job has been to look into mortgage lending, how to stabilise it and prevent volatility in the housing market from causing adverse effects in the wider economy.
WHY HAS IT TAKEN YOU NEARLY 10 YEARS TO REALISE AN OBVIOUS AND FUNDAMENTAL PART OF YOUR JOB?
Imagine Cosmonaut Yuri Gagarin hadn't bothered to learn how to fly his spaceship? Would the Americans have then gone into space? Would we have all the satellites that run the world's communication now? Possibly not.
The fact that Miles says in the same breath "There may be no price at which it makes commercial sense for such a loan to be available" inferring that there just might still be an occasion to lend out more on something than it's actually worth just ups the insanity level even more.
Am I being unfair?
For all the people in negative equity right now because you took out a mortgage at 100% or higher LTV – do you think this man deserves to be in this job? Do you think this man has any idea on how the mortgage regulation should be set? Do you think he should have anything to do with how interest rates are set at the Bank of England?
I doubt it – it would be as responsible as putting your cat in charge of a rare budgie collection.
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