Banks for Making Poor Loans
In the boom years, banks made an increasing number of loans with little regard to ability to repay. Banks found ways to increase the number of mortgage loans through strategies such as interest only mortgages, 100% mortgages and lending to people with poor credit histories. The result is that more homeowners are at risk of mortgage defaults. It is this rise in mortgage defaults that led to bank losses and reduced their willingness to lend.
- UK and European banks could argue that they have been positively responsible compared to their American counterparts. UK banks will argue that without the US Subprime debacle, the mortgage industry wouldn't have collapsed like it has. Mortgage repossessions in the UK, although increasing by 40% in last 12 months, are still a small % of the total mortgage market.
- The American subprime mortgage firms who made a rash of bad loans to people with poor credit, can find little to excuse their behaviour.
- The whole banking system for selling and buying the sub-prime mortgage debts as Triple A star safe loans. Certainly the mortgage companies who sold irresponsible loans can be blamed. But, somehow these risky loans were absorbed into the whole financial system. There was a general failing in evaluating the riskiness of loans. Over confidence and complacency seeped into the whole financial system and was not just isolated in a section of the US mortgage industry. This is why the problems in a section of the US mortgage industry affected the global capital markets.
Surely consumers should take some responsibility for taking out mortgages they couldn't pay back. However, whilst this is true to some extent, I think it is disingenuous to blame consumers too much. Mortgage companies actively targeted people with aggressive sales pitches. The real cost of mortgages were often hidden, especially in the US. It is not unreasonable for a consumer to assume if a bank is so keen to lend a mortgage then the consumer must have a reasonable chance of repayment.
Rising house prices encouraged people to buy houses. In London, many houses were snapped up by foreigners, this contributed to the boom. It is in these areas where house prices are now falling rapidly. However, this merely exacerbated volatility of house prices rather than causing the credit crunch.
Estate agents would be a populist target. However, I don't think they can be blamed for cause of the credit crunch. They may give bad advice, like trying to encourage people to buy at the peak of a boom, but, the price of houses are determined by market forces and not estate agents. Estate agents may have fed the myth that house prices would never fall, but, they are not the ones giving mortgages to people with poor affordability.
It could be argued the government should have done more to regulate banks who were lending irresponsibly. The credit crunch has shown that financial institutions can easily abuse systems of self-regulation. The big question is whether government bail outs of banks in trouble has created moral hazard. - By preventing banks going under, have the governments given tacit approval for future bad decision making?