Firstly, let’s rewind to what happened leading up to the 2007/08 “Credit Crunch” to get an insight. In the 1970s and ’80s, a first time buyer in Hull would probably go through a building society if they were wanting to take out a mortgage to purchase a home.
Back then, it was the norm to make an appointment with the building society manager to see whether or not you qualified for a mortgage. This was at the time where banks didn’t always do mortgages! The process would involve the customer taking out a savings account with the building society and the building society would then use that money to lend to other customers. For the building society to make a profit, the interest rates would be higher to borrowers than the rate they were paying to savers.
They moved away from the older model when the banks got involved in mortgage lending. The new strategy would be where lenders would “buy” the money from markets. This would speed up the process in which they could lend out to customers.
Jumping to the mid 2000s; The market was full of new specialist lenders, with many of them originating from North America.
Known as ‘securitisation’, the lenders would sell their book of mortgage customers to raise new money and lend again. Usually, the books were bought by investors from larger financial institutions such as pension funds and high street banks.
Due to the greater deal of money made from the market, new lenders saw this as an opportunity to introduce more relaxed and flexible lending criteria. The lender saw poor credit history and self-certify mortgages as no issue, though it soon became apparent that it was just that; an issue.
Due to the relaxed lending criteria that lenders introduced, these mortgages, obviously, began to default. This lead to major banks losing confidence in each other, because of the uncertainty of how exposed they were in the fast unraveling sub-prime mortgage market.
The banks’ share prices plummeted in no time. Some, however, were bailed out by the UK Government (or more accurately, the taxpayer) to prevent them from going bust. Unfortunately, not all were bailed out and failed.
Because of “The Great Recession”, almost 80 different banks, building societies, and lenders across 20 different countries filed for bankruptcy or were acquired. Once this happened, lending dried up quickly.
It took nearly a decade for the market to recover safely. Property prices significantly dropped and everyone lost confidence in the UK economy.
This event is one that we don’t want to happen again. To prevent this, The UK government carried out investigations into what went wrong. This led to the “Mortgage Market Review 2014”.
With self-cert mortgages banned, responsibility for the affordability of mortgages was now in the hands of the lender.
There were in-depth investigations into customers’ incomes and outgoings with more precise lending criteria. Credit commitments, childcare, and other outgoings were now something lenders were paying more attention to. From this, lenders would be able to ensure customers could consistently afford their mortgage repayments.
Getting a mortgage is a lot tougher now than it was before. To prove their finances get taken seriously, customers need to be more organised with paperwork. Many mistakes happened running up to the Credit Crunch, however, the industry has learned a lesson to hopefully minimise the chances of this ever happening again.