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Written by Rosalind Renshaw

Rethinking the loan to value approach: As the printing presses crank up and interest rates are cut to their lowest levels in history, many property analysts are tentatively expecting house price inflation in the near future. While this may inject some life into the housing market, first-time buyers, who are finally able to afford a property, will be priced out again.

Here is the issue: if property values rise and fall like the price of gold, any ‘collar’ or LTV introduced is useless if the asset goes through a bubble – the only constants are the asset and the borrower, not the value.

Today’s conditions are a catch 22 situation for first-time buyers. For the first time in years, they’re able to afford a property, but the low LTVs being offered by lenders are making it nigh on impossible to afford to get on the market. Many are able to afford the repayments, and if lenders took a more intelligent approach to their lending, would be exactly the kind of low-risk borrowers they would want to take on.

There are millions of people like this – ready to get back on to the market but unable to, because of ridiculous LTVs they’re being offered on mortgage deals. This is the main reason why many estate agents I’ve talked to have reported surges in inquiries but without a similar rise in instructions.

There are a million and one solutions to this crisis, but essentially what we need – what we can all agree on – is that as soon as lending becomes available, the pent-up demand will bring an influx of home movers back to the market, revitalising the UK economy.

The question is how to get banks to offer more realistic products. Risk managers are running around their extensive Canary Wharf offices worrying about repeating the mistakes of self-certification mortgages and 100% LTVs, but in the process are preventing low-risk borrowers who may not have £30,000 lying around from doing what we all need them to do – borrow money. The reality is that the bubble has already burst and the risk wasn’t managed at the time. This focus on LTV is like closing the barn door after the horse has bolted.

Lenders need to rethink how they lend by implementing smarter risk management. By sticking to realistic parameters, lending can flow with minimal risk to the lender. Offering 90% LTVs anchored at three times salary would be a realistic starting point. This would give many young couples or young groups of friends with good jobs the chance to take advantage of low prices and take up their places at the bottom of chains.

As long as they have some ‘skin in the game’ they can be considered a relatively low risk, and provided checks are carried out to make sure they are able to afford repayments, the doors are open to a whole host of new low-risk lending. Owner occupiers vary rarely choose to be repossessed – behind most repossessions there will be a question mark over the suitability of the borrower, not the property.

Savers should also be able to benefit off the back of this. The much maligned mortgage backed securities and CDOs were structured to enable banks to move long-term loans on to savers looking for yields. Unfortunately there was little or no due diligence around the lending or the quality of the security, which is where the toxic debt issues stemmed from.

Some of the techniques used in slicing debt could easily be applied to mortgage products that everyone understands. Savers could chose to invest in the top slice of the mortgage debt to gain a higher interest rate return or blend the return according to their attitude to the risk.

In this way, savers can enjoy some of the benefits of investing in bricks and mortar and the banks will have to lend the money raised into the housing market. Using affordability to manage risk is far more realistic where we have assets that are more than investments – they are people’s homes.

As I said at the start, the bank is printing money and interest rates are the lowest in history. The conditions are perfect for a revitalisation of our industry and the wider economy, built on a solid foundation of responsibility and intelligent risk management by lenders.

At the risk of sounding like an American presidential nominee, will we get more of the same, or the change we need?

* Robin King is director of movewithus

Comments

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    We need to see lenders favouring FTB's on sensible deposit to loan ratios. By restricting purchase by high LTV's lenders are simply fuelling the fire. Primary residences should also be given presidence over investment buys. It would be nice to see next year a steady 4-5% increase on properties and for investors again to see 3-4% return on money in the bank. Maybe FTB's finding 10-15% again would be good, with buy to let finding closer to 30-40%.

    • 09 March 2009 11:21 AM
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