|PRESS RELEASE - ECRC's UK member DOOD has made a comment to the media on the current Northern Rock episode in the UK. It also serves as an example of how members from the different countries can add the ECRC logo to their press releases to increse the visibility of our coalition's efforts. Thank you Damon Gibbons.
|Press release - 18-9-07 (see attachment below)
HITS HOME – WHY NORTHERN ROCK IS ONLY THE START
Debt on our Doorstep and the European Coalition for Responsible Credit today issued a stark warning that the Northern Rock crisis, considered by many commentators an after shock of the US sub-prime lending disaster, is in fact a precursor of wider problems that will be witnessed in the UK over the next 12 months.
In a joint statement, Damon Gibbons, Chair of the Debt on our Doorstep campaign, and Professor Udo Reifner, Chair of the European Coalition for Responsible Credit urge the UK government to place new obligations on British banks to both act responsibly and ensure access to credit for low income households. They argue that assistance to the banking industry at this time should not be given on a no-strings basis and that an urgent review of the role of bank policies that exclude the poor should now be undertaken with a view to removing the market segregation that gives rise to sub-prime lending and has led to the current crisis.
“This crisis has been caused by irresponsible lending practices in the U.S, and we know from the FSA’s work in recent months that UK sub-prime lenders have also been irresponsible. As mortgage costs rise in the UK, low income consumers will face the same problems as their American counterparts, and this will magnify the impact of the credit crunch in the UK.
Ultimately, lenders will become more restrictive in their lending – on the face of it a good thing, but in reality it will drive low income households into further difficulties and leave them in the hands of predatory and extortionate lenders.
We call on the Government to place greater duties on mainstream lenders to meet the credit needs of low income communities – for them to be obliged to act with responsibility and to provide access. The current segregation in the credit market must be abolished as this has directly given rise to the current crisis. Only with those obligations in place, can central bank and government assistance to the banking industry be justified. What we need now is banking for, and not against, the people.”
THE CAUSE OF THE CURRENT CRISIS – US LENDER IRRESPONSIBILITY AND GREED
“The causes of the credit crunch affecting Northern Rock clearly lie in the irresponsible lending practices of US sub-prime lenders. Mortgages have been provided to low income households in a variety of predatory and extortionate ways on the assumption that house price rises would protect the lender from the risks of default. However, not content with providing honest products that would enable poor people to access home ownership, the lenders constructed products that allowed them to be exploited (for example adjustable rate mortgages, and mis-sold ‘liar loans’ that did not require brokers to check applicants income details).
At the heart of the problem was a ‘get rich quick’ mentality of US sub-prime lenders and a lack of ethics or responsibility to the borrower in the long term.
With the downturn in the US economy these excessive risks have now come home to roost. Mortgage foreclosures in the US are at a record high, and the human cost is impacting at a political level with the US Government forced into intervening to protect genuine borrowers from bankruptcy.
GLOBAL FINANCIAL SERVICES TRANSMIT RISKS FROM THE US TO EUROPE
The risks taken on by US sub-prime lenders have now been transmitted to mainstream credit markets in Europe through a variety of weird and wonderful methods of debt securitisation that were bought into by banks across the globe. In the same way that US sub-prime lenders did not care about the financial position of their applicants, the UK and European banks paid no attention to the true value of these financial instruments. As a result, no lender in the UK and Europe truly knows their own exposure .
Not knowing the level of exposure to these ‘junk bonds’ affects even those banks that have large levels of deposits. Even they are now unwilling to lend out cash without demanding a much higher price than previously - leading to rate rises that will ultimately cause problems for all households with mortgages or outstanding credit. The central banks have a choice of intervening with cash handouts for financial institutions that are worse hit – effectively subsidising the irresponsible with tax payer’s money; or sitting back whilst more households struggle to cope with increased mortgage costs.
THE CREDIT CRUNCH
Meanwhile the credit crunch affects more than those that are exposed to sub-prime risks. Northern Rock does not have much direct exposure. But, as a relatively small holder of deposits, its business model requires it to have access to large amounts of credit to fund further lending. In recent statements, Northern Rock states that they had recently scaled back their lending. That may be true in comparison to the past few years during which the company sought to grow at exponential levels.
But Northern Rock was also guilty of underestimating the likelihood of interest rate increases and had sold large numbers of mortgages on cheap fixed rate loans in order to attract a major market share. As a result, many of its borrowers are now paying back at lower rates than it must itself pay back its own creditors. To address this, Northern Rock had to raise finance to lend further. When it could not afford to obtain this at market rates it went to the central bank for help. For this reason, despite central bank assurances, the so-called naive and ‘herd’ behaviour of depositors seeking to take out their savings from Northern Rock is, in fact, rational behaviour. The company is not viable in today’s changed market place – and that is reason enough for depositors (acting as small investors) to decide to switch their money elsewhere.
Those UK bankers that have been at the forefront of applauding the free movement of capital around the globe and have consistently advocated for the liberalisation of capital controls with little sympathy for the countries they deprive of investment, now find that they are victim to the same effects as their depositors remove their investments on en masse all over the country.
WHAT NEXT IN THE UK?
The UK’s own sub-prime housing market has been booming in recent years . As mainstream banks withdrew credit from low income households, and as house prices increased, the sub-prime lenders moved in. Regulation of this sector of the market has historically been weak. In 2005, the FSA warned that 60% of sub-prime mortgage loans were sold without proper knowledge of the applicants financial circumstances. In addition, they reported concerns about the suitability of sub-prime mortgages being sold as a means of debt consolidation:
“…in 80% of cases, there was lack of evidence to show how the recommended sub-prime product met the customer's needs and circumstances; and in 67% of those cases which involved debt consolidation, firms could not demonstrate that they had taken account of the additional requirements related to debt consolidation mortgages and thus it was unclear whether the recommendation was appropriate.” (FSA press release, September 2005)
Despite having issued good practice guidance to mortgage lenders and brokers, the FSA found on conclusion of a further investigation in July 2007 that:
“None of the lenders adequately covered all relevant responsible lending considerations in their policies. For example, some firms’ lending policies contained unclear affordability or self-certification requirements.
In many cases, lenders did not apply their own policies in practice. For example, some firms failed to check the plausibility of information, as required by their own lending policy.
There were also failings by lenders to monitor the application of their policies, which resulted in the approval of potentially unaffordable mortgages. “
These regulatory failings, coupled with rising mortgage rates and an increased overall debt burden amongst UK low income households is starting to lead to increased defaults and repossessions. Only last month, the Council of Mortgage Lenders in the UK revised their repossession figures to take account of the increased activity of sub-prime lenders in this respect.
The problems that we are witnessing in relation to the current US sub-prime market problems will be repeated in the UK, causing the credit crunch to become further entrenched.
The initial response of lenders will be for them to transform themselves into the advocates of responsible lending – repeating the so-called ‘flight to quality’ that caused the mainstream markets to desert low income communities in the late 1980’s and 1990’s, and which created the conditions for the rise of sub-prime lending. As the credit crunch will impact on both the housing and consumer credit markets, more and more people will become excluded from mainstream credit. Predatory Home Credit and Payday lenders must be rubbing their hands at such a prospect.
WHY WE NEED BANKING FOR THE PEOPLE
In the final analysis this process will result in a further entrenchment of the current segregated credit market – with larger numbers of people cast outside mainstream financial services being charged increased prices.
As genuine consumer advocates of access to responsible financial services, we urge the UK Government to think for the longer term and to introduce measures to expand credit through mainstream financial services to people on low incomes. We ask for them to end the current dual market for credit that has given rise to this current crisis – an injection of capital to financial institutions now must be coupled with requirements to meet the needs of the whole population for financial services at fair prices with strengthened regulation.
We call for financial services to meet their obligations – to provide both access to credit and to exercise ethics in the provision of that credit. Now, more than ever before, we need banking for the people.”
Created: 18/09/07. Last changed: 20/09/07.
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