The Madness of Mortgage Lenders: Housing finance and the financial crisis

Article

In this paper Professor Chris Hamnett of King's College, London analyses the role of mortgage lenders in the collapse of the UK housing market and explains the institutional changes that led up to the pre-crisis lending activity. He then sets out a number of policy recommendations designed to reduce the recurrence of the present crisis.

We are all familiar with the collapse of the UK housing market since its peak in autumn 2007. House prices have fallen 20 per cent from their peak, the number of sales is down 50 per cent - as is the volume of mortgage lending - and new housing starts are down by around 70 per cent to a projected 60,000 in 2009. In addition, mortgage arrears and the level of repossessions have risen sharply. The housing market is in trouble.

The argument that this paper makes is that the housing bubble, and the subsequent collapse, owe a great deal to the reckless lending behaviour of a number of mortgage lenders, particularly the demutualised lenders such as Northern Rock, the Alliance and Leicester and the Bradford and Bingley, who were driven by highly incentivised senior executives in a drive for market share and expansion. In so doing, they abandoned many of the principles of sound lending that had guided the building societies for decades and failed to learn the very clear lessons of the late 1980s and early 1990s housing market boom and bust. The early 1990s slump generated significant losses for mortgage lenders and led 500,000 owners to be repossessed.

The key question which must be asked is: Are mortgage lenders capable of learning from history or are they doomed to repeat it?

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