The business - Patrick Hosking hears some mortage whoppers
The Bank of England has a hopelessly rationalist view of human nature. Investment markets (and, boy,
The BBC's Money Programme is becoming highly watchable. Its recent item on self-certificated mortgages was excellent. The hidden cameras exposed a dodgy scam - brokers, estate agents and banks all shamelessly egging on prospective borrowers to lie in order to get home loans. They may also have stumbled upon one reason why house prices continue to rocket; why the Bank of England has relentlessly been wrongfooted on the one indicator that dictates economic growth; and why it's increasingly likely that the house price bubble will end in tears.
Used wisely, self-certificated mortgages are eminently reasonable. They enable millions of self-employed people to borrow without the PAYE evidence with which employees can prove their earnings. The lender takes the stated earnings on trust. The borrower has to put down a bigger deposit than normal and pay a higher interest rate, but at least they can borrow. However, "self-cert" mortgages also allow any liar, fantasist or fraudster to borrow large sums with no questions asked.
The home-loan industry insists self-cert mortgages are a minority sport. I'm not so sure. One broker interviewed by the BBC reckoned that one in three home loans he now negotiated was self-cert. Neither the Council of Mortgage Lenders nor the Financial Services Authority has any idea of the size of the sector. Halifax Bank of Scotland - the country's biggest mortgage lender and the organisation most emphatically skewered by the BBC - can say only that "less than 10 per cent" of its total net new lending is self-cert. This is still a huge chunk of credit.
Moreover, most of the big mortgage companies routinely lend, without checking out earnings, to anyone prepared to put down a large enough deposit. They do not necessarily classify these loans as self-cert. The extent of the lies is also unknown. Maybe the malaise is restricted to a few desperate geezers overstretching themselves in west London, but the programme suggested that it could be a widespread problem. Many people will tell whoppers to access ready cash.
The lenders are protected because of the buffer of a big deposit. Should interest rates soar and house prices plunge, the lender can repossess the property and still recover the debt. It is the borrower who is horribly exposed.
What are the chances that brokers have warned customers of the possible dangers? Not high, I'm afraid. Brokers get their commission (typically 0.3 per cent to more than 1 per cent of the loan amount) on completion of the home purchase. They have no incentive to ensure the borrower can afford the loan. Not a moment too soon, mortgage-broking comes under the auspices of the Financial Services Authority next October. The industry will moan about the red tape and the extra cost. They have no one to blame but themselves.
By the time this issue hits the streets, the Bank of England will have made its November interest rate decision. The majority view is that it will lift the base rate by a quarter point to 3.75 per cent. I hope it has the courage to lift it by a half-point. For, with the benefit of hindsight, the Bank has failed. It has allowed a fresh burst of gas further to inflate the house price bubble, persuading consumers to embark on a bigger-than-ever borrowing spree. July's cut in the base rate now looks like a serious mistake.
The Bank has repeatedly been wrong-footed by the housing market. For years, it has confidently predicted that the growth of house prices will slow and that rational homebuyers will just say no.
It's a hopelessly rationalist view of human nature. Investment markets (and, boy, is property seen as an investment now) just don't work like that.
The Bank needs to act urgently. The longer the delay, the greater the pain later.
The most resonant fact about the final flight of Concorde was this: only three passengers out of 100 had actually paid for their tickets. The rest - led inevitably by Sir David Frost and a string of businessmen and celebs - were on freebies. How apt. To the very end, Concorde passengers were subsidised by other (less well-off) people.
Throughout its 40-year history, Concorde has been an impossibly elegant machine for sucking money from the pockets of ordinary people (first UK and French taxpayers, then British Airways and Air France passengers on slower but more profitable flights) for the benefit of the tiny elite who actually flew on the wretched, beautiful thing.
Concorde was Versailles with wings. It cost British taxpayers £11bn or £20bn, depending on whether you believe the Guardian or the Daily Telegraph.
The reason it failed was that the people noisily lamenting its demise - Frostie, Joan Collins et al - were never actually prepared to pay the full fare.
Patrick Hosking is deputy City editor of the London Evening Standard