The Last Ditch by Tom Paine

I had an interesting conversation with a member of my family yesterday. She handles mortgage approvals for one of the few institutions still lending. She was telling me they are being more prudent. They closed 25% of their mortgage call centres at the beginning of the crisis and they are now about to close another 25%. They are receiving many applications, because they are still in the market. Most approvals are for remortgages, mainly for people who are coming to the end of their fixed rate deals. She says the institution is upgrading its mortgage book by accepting only the best of these applications.  I was reassured.

Then she also told me about a new mortgage application she had accepted this week. The applicant works at a car manufacturer on a 13 week temporary contract. The institution’s policy is that his income can be accepted if his temporary contract has been renewed twice. It has. He wanted to borrow X units of debt, but this could only be justified if his overtime income was taken into account. He pushed and pushed for this but she refused, eventually telling him that Y was all he could have. He went back to his vendor who reduced the price by X-Y so the deal could go ahead. She wryly observed she is "still waiting for the box of chocolates."

This little story suggests to me that reality has still not dawned in Britain. If the new "prudent" policy is lending to a man on a 13 week contract, what the hell was the old one? If refusing to accept even-more-uncertain overtime payments is the new "hard line" what on earth was the soft line? This is a man who should not have been able to borrow. He is part of a buffer of easily-sackable temporary workers in an industry which will be among the first to suffer in a recession. He should be renting his house on a contract as short-term as his income.

Doesn’t the fact that the price fell immediately to the precise extent that the debt was not available prove that house prices have broken their historic relationship with earnings precisely because of the easy availability of debt? Had she authorised Z units of debt less, wouldn’t the price have fallen further?

I don’t think this story is anywhere near its end. And I don’t think the government (with the support of its opposition cheerleaders) indebting the nation to prop up the markets is going to work. Until I hear our institutions are only lending to people to whom you or I would lend our own cash, I will not believe this problem is over.