In Praise of 100% Mortgages

I get really annoyed when I hear people make statements such as, "the banks were crazy to give out 100% mortgages" and somehow link 100% mortgages in their mind to the Credit Crunch, and the current turmoil in Financial Markets. The two are only very extraneously linked. It'd be a bit like saying that Chips shops have caused the obesity crisis, or that Cod Liver oil sales are the reason behind the pension crisis (so many crises!)

The real problem mortgages were NINJA's in the US, or what we would call subprime self cert in preferred mortgages the UK. A subprime self cert mortgage is a home loan where the bank realised that the borrower had a poor credit record, and could not prove their wages (leaving the system open to abuse) but were willing to lend the client the money they asked for in exchange for them paying a greater than normal interest rate. These mortgages were never, ever 100% Loan to Value. In fact the highest level I can recall these mortgages being offered at was 85%. From the banks point of view they felt that the deposit being put down by the borrower, alongside the general upward trend in house values meant that their preferred mortgages investment was pretty safe.

Surprise, surprise though, there has been a much higher repossession level amongst these clients than you would expect. The 15% margin of error has been eaten up by rapidly dropping house prices. Can you see then, that the level of deposit put down by a buyer is much less important than their credit record?

Looking ahead to the future, the bank that realise this first will make more money than anyone who ever dealt in NINJA mortgages. If I was the government and I owned a formerly huge mortgage lender, I would take that opportunity and use this knowledge to kick start the housing market once more.

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