FSA chairman Lord Turner calls for end to 100% mortgages

Published 18th Mar 2010

• Borrowers 'should be forced to save for a deposit'
• Fears that lending at high loan-to-value ratios may return


The City's top regulator has called for curbs on 100% mortgages and a return to mortgage rationing to prevent another boom and bust in the housing market.

Lord Turner, in a wide-ranging critique of financial markets, some of whose activity he has previously described as "socially useless", said policymakers needed tough new tools to prevent the mortgage market getting out of hand in future.

In remarks that might be interpreted as a call for credit controls such as those seen in the decades after the war, the chairman of the Financial Services Authority spelt out the need for a wide range of policy options, but said that one should be to force borrowers to save for a deposit before they are granted a mortgage. "We need new tools to take away the punch bowl before the party gets out of hand," Turner said.

While mortgage providers have been restricting the size of loans they are prepared to offer as a result of the banking crisis, the authorities are concerned that, once more benign economic conditions return, lenders might again grant loans that are larger than the value of a customer's home.

In an hour-long lecture to the Cass Business School in London, Turner sent a message to the next government that more needs to be done to make banks focus on activities that provide value for the real economy, rather than simply doing deals in trading rooms.

While he admitted that he should have used the phrase "economically useless" rather than "socially useless" in his Prospect magazine interview that made headlines last summer, he said his aim was to spark debate about the role banks should play in the real economy. He highlighted the fact that 75% of all bank loans in the UK are made to the property sector and are motivated by expectations that prices will rise sharply rather than by ideas of "productive investment".

Authorities in Canada and Hong Kong already use tools to restrict credit. The City regulator has also been asking the industry whether there should be restrictions on loan-to-value ratios – the size of the loan as a proportion of the value of the property – and could disclose as early as next week the responses it has received.

Turner said: "We need a new set of macro-prudential policy tools which enable authorities more directly to influence the supply of credit and … these tools may need to be able to distinguish between different categories of credit – for instance real-estate versus others."

He highlighted four such tools:

• Introducing borrower-focused policies, such as limits on loan-to-value ratios;

• Increasing interest rates (although he accepted small businesses would be hurt by the use of this measure long before it would deflate a property bubble);

• Requiring banks to hold more capital in boom years (although he warned this could affect the price of loans);

• Requiring banks to hold more capital against certain types of lending (although he warned this might impede competition unless introduced Europe-wide).

Turner said: "There are no easy answers … but some combination of new macro-prudential tools is likely to be required." He added: "A crucial starting point … is to recognise that different categories of credit perform different economic functions, and that the impact of credit restrictions on economic value added and social welfare will vary according to which category of credit is restricted."

In his lecture, he asked whether the increased trading activity in the financial sector in the last 30 years had delivered economic value by reducing transaction costs and making markets more liquid. Admitting that he did not know, he said: "We certainly need to have the debate rather than accepting as given the dominant argument of the last 30 years, which has asserted that increased liquidity, supported by increased position-taking, is axiomatically beneficial."

Source: ' Guardian '

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