It is Obvious

Chris Rick has got altogether too much to say

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Posted by chrisrick13 on November 20, 2013

It is obvious: it is easy to count all the black sheep in a field

I just heard a building society official being interviewed on the radio.  There was a lot of time spent on 95% loans being risky.  The building society guy said that it was not a risk but that 120% loans were risky.  He said that most of us had loans on houses that were 95% at the beginning.

I do wonder that such rubbish is allowed an airing on the radio especially Radio 4.  Still today’s rubbish was minor compared to the interviewee yesterday who declared the economic problems of the world fixed without challenge from his interviewer.

In 1978 I took out my first mortgage.  It was for £10,000 and I put down £100…borrowed from my parents.  The criteria for acceptance for the loan was that 3 times my salary plus my wife’s had to exceed the loan.  It did that quite easily.  This lending model was based on long-term average interest rates and our ability to repay the loan.  There was no consideration for house prices going down, they just didn’t.  Nor did they go up much either.  They just trundled along at a couple of percentage points a year.  Interest rates oscillated in a narrow band.  This had been the state of affairs for many years apart from the ‘Barber Boom’ in 1972.

So what is the big deal on 20%+ deposits for houses?  The simple answer is risk.  The banks know that there are tough times coming and they will not take a risk.  So they have put it all on the lender and, with the government guarantee scheme, you and me.  The risk comes from two directions: house prices going down, interest rates going up.  It is a different world to 1978.

The only solace I take is that 25% might wipe out the borrowers and us via the government guarantees but it won’t be enough protect the banks.

It is obvious: it is easy to count all the black sheep in a field: count all the sheep then count all the white ones and subtract the two numbers.

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