In the past 18 months or so, most of the developed world has seen a huge cut back in mortgage lending to the consumer and interbank lending in general. As rumours of the recovery continue to smolder in the corner, with no real leap of confidence in any direction just yet, we see that the British Government has announced it’s intentions to promote 90% LTV (Loan to value) mortgages with an injection of �180m into the Post Office.
Peter Mandelson, (Business Secretary to the Government) said “Since the global banking crisis we have set about reinventing the financial services industry piece-by-piece, building a system that is fairer, trusted and more responsible. Today is the next step in that process. The Post Office is a well-loved community institution and this move will bring more banking services back to the heart of those communities."
For those of you reading this from outside the UK, the Post Office is an institution with 1000’s of branches nationwide. Traditionally used for anything to do with posting things, the Post Office expanded into banking some time ago, and given its accessibility (11,500 branches) it certainly is a force to be reckoned with.
Whilst on the face of it, this does seem like great news for all, one does have to question the reasoning and justification behind it. If memory serves me correctly, it is lending exactly like this that led to the recession in the first place!
The recession came about primarily due to the ease of credit availability. The credit itself was not especially cheap, but it was easy to get. As a result, lending shot up, property purchasing numbers got into a moon bound rocket with house prices being dragged along for the ride.
Then, as the old “supply and demand” factor kicked in, house prices gained an extra boost pushing them further still, and more elaborate mortgage products where concocted (NINJA’s
) As a result, house prices generally became unsustainable, and started to drop. This is where the problem started. Prices fell. All too quickly, the dreaded “Negative Equity” reared it’s ugly head. Owners began to default, payments didn’t get made, and banks ended up with a whole hoard of property worth a fraction of what they had lent on it.
One really has to ask here whether a 90% LTV is a wise idea through a Government backed entity? As far as we can see, the UK is the first Government in Europe to be doing this, and no sign of the US jumping on the bandwagon. With a general election looming, is it all just smoke and mirrors by the current UK government?
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- Monday 29 March 2010