Bremner, Bird - and Turner?

HAVING once suggested, with tongue only very slightly in cheek, that Bremner, Bird and Fortune's satirical TV series “Silly Money” contains the best explanation of the credit crunch, it was pleasing to see last week that Financial Services Authority chief Lord Turner appears to agree.

According to John Bird's merchant banker character: “It is an absolutely unbreakable law that property prices will never keep on rising for ever and only a complete idiot would think otherwise - it's just that this time we thought they would.”

The Turner Report on the future of banking regulation, which was published last Wednesday, put it this way: “Both some customers and some providers relied imprudently on the assumption that ever rising house prices would reduce the risks otherwise inherent in high LTVs (loan-to-value ratios)”.

Stripped of its jargon and caveats, the sentiment expressed by Lord Turner was very much the same as that of John Bird, only without the comedic gifts of irony and timing.

In anticipation of such a finding, there was feverish speculation ahead of publication that Lord Turner's report would include drastic measures to prevent any recurrence of such a damaging “bubble” in the mortgage market.

Thankfully, Lord Turner was rather more restrained, and contented himself - on this occasion at least - with setting out proposals for a consultation on the question of mortgage controls which will now take place during the autumn. His caution is well merited.

Given the catastrophic failure of the market discipline on which regulators have previously relied, a more interventionist regime is clearly required. But to what extent this intervention should mean micro-managing individual lending decisions is another matter.

The absurdity of 125% LTV mortgages was always bound to end in tears and 100% LTVs also plainly leave both borrowers and lenders vulnerable if property values fall.

But then so too will lower ratios if house prices fall steeply enough, and yet a restriction which errs too far on the side of caution could seriously hamper the ability of many first-time buyers to enter the market, with an inevitable knock-on effect further up the property chain.

And, as Lord Turner also acknowledges in his report, there is the possibility that some people desperate to climb on the property ladder will fund the shortfall through unsecured borrowing, possibly even on credit cards.

The further possibility of restrictions on loan-to-income (LTI) ratios could be an equally blunt instrument unless they are applied according to a sliding scale which takes into account the relatively higher proportion of income which higher earning households can afford to spend on their mortgage.

Even then, such a restriction is likely to restrict unfairly the house purchasing plans of some people, who might be willing to forego other luxuries in order to buy their “dream home”, and yet fail to prevent loans turning bad in the case of people who, despite ticking the box in terms of the LTI ratio, fail to live within their means.

Restrictions on LTV or LTI ratios may have a part to play in the new regulatory regime, but the FSA should focus more on macro-level measures to control the debt swaps and other types of financial sophistry which is what really sets the current crisis apart from previous property crashes.