Since the beginning of the credit crunch and the economic slow down which has followed, the housing and homeowner loan markets have taken a huge hit as individuals stopped buying and banks and building societies have become extremely reluctant to offer new loans to anybody, even those with a perfect credit record, unless they only require a low loan to value ratio and don’t want a loan of more than three times their salary.

Of course the worst affected people in this situation are the first time buyers, who generally need large income multiples and high loan to value ratios.

More and more first time buyers are becoming ever more dependant on their parents to enable them to make that first move on the housing ladder, which in many cases, sees parents re mortgaging their own home in order to provide a suitable deposit amount for their children.

Bath building society has recently launched a new homeowner loan product which is designed specifically to help first time buyers. The Parental Assisted Mortgage Scheme (PAMS) is designed to allow parents to act as guarantors on their children’s loan and will take a legal charge over the parental home, thereby providing additional security for the new loan.

The scheme will also be available to second time buyers, on the same basis and will also allow for a room to be let out in the property, to help with the loan repayments.

A spokesman for Bath building society said “Now that prices have dropped back in the property market, this is a good time for buyers to reach the first, or their next, step on the housing ladder. Until now, the problem they have faced is a lack of mortgage funding, which means that lenders will only provide mortgages to those with the highest deposits.

Also, with lower interest rates in the market, and the value of properties well below their peak, we can envisage a number of people wanting to take advantage of this product.”

Throughout history, a number of people have always borrowed more on loans than they could realistically afford and inevitably ended up in financial difficulty, this is nothing new and in all probability the same trend will carry on well into the future.

But just recently, since the start of the economic slow down and credit crunch, many people’s personal debt situation has hit them hard, as their level of disposable income has dropped significantly and they start to feel the pressure of managing their money and repaying their personal loan, mortgage or homeowner loan and credit card debts.

When an individual finds themselves in this situation, it is human nature to try and blame somebody else for their own mistakes and banks and other lending institutions have always been a useful scapegoat, never more so than at the present time, when the banking sector as a whole has been largely held responsible for the current economic crisis by offering large loans to individuals who could not repay them.

How many people have said “It was the bank’s fault, they shouldn’t have given me the loan in the first place.” (go on, hands up…admit it!)

But now, as the Government takes a stand against irresponsible lending, one charity organisation has said that borrowers, as well as the banking sector, should take responsibility for the personal loans and credit cards they take out.

Becky Boden-Wilks of Money Advice Trust welcomed the announcement from the Government, but claims that consumers are equally responsible for their finances and noted that cheap loans are becoming harder to find all the time. She said “You are the expert of your own situation and you know what your income and outgoings are, you should know what you can afford and can’t.”

We reported yesterday on the results from the Turner report, which considered the possibility of new regulation for mortgage and homeowner loan products, effectively limiting the level of loan to value a person could borrow, as well as reducing the amount which could be borrowed on income multiples to a maximum of three times income as a loan amount.

Even though these changes have not yet been approved and have been passed to the Financial Services Authority (FSA) for consideration, it seems that Lord Turner has stirred up a hornet’s nest with his proposals within the financial adviser and homeowner loan broker community, who have been quick to condemn the ideas to limit loan amounts and voice their anger at the proposals.

Other groups who have joined the debate on the subject include the Royal Institute of Chartered Surveyors (RICS), the Association of Mortgage Intermediaries (AMI) and the consumer comparison group Which?, who have all spoken out against regulatory limits on loan to value and income multiples. The main concern from all parties is that the introduction of such limits on loans is likely to kill off what is already an extremely fragile market.

Peter O’Donovan from Bestinvest said “Excessive house price increases was due to lack of stock, rather than mortgage products. We have all seen how lender’s reluctance to lend at higher loan to values has stalled the recovery, but if an outside agency can control who they lend to then the market will never recover. The FSA is basically preventing first time buyers getting into the market on affordable products. This in turn will bring more highs and lows as vendors try and work out the optimum time to market their properties.”

One Independent Financial Adviser commented that he thought the FSA were out of touch with reality “It is in very poor taste. The regulator considering only three times a salary as an acceptable mortgage shows that the head of the FSA really has no idea whatsoever about people on the street who possibly earn £20,000 and would therefore only be able to borrow £60,000 under that proposal.”

Yesterday (March18th) saw the publication of the report by Lord Turner, into the current Economic Down turn and the recommendations to prevent such problems happening in the future.

One area which was expected to be covered in the report was that of regulation of individual mortgage or homeowner loan products. Currently, advisers and lenders are authorised and regulated by the Financial Services Authority (FSA) in how these loan products are marketed and sold, however this could now be extended to the actual products themselves.

Lord Turner’s report does not make any actual recommendations at this stage, but has suggested that the FSA should look into such action within the next six months and have implemented their recommendations by the end of September this year.

The main focus of regulating  homeowner loan products is likely to look at the maximum amount an individual is able to borrow, by placing an upper limit on loan to value ratio’s and also loan to income multiples. The rationale behind this idea is quite sound and is clearly intended to put a stop to some of the irresponsible lending practice which have occurred in the past, such as people being able to obtain a loan for five or six times their income, for example, or having a loan to value ratio of 125 per cent.

On the down side of the argument, limiting loan to value and income multiples could have a severe impact on the housing market and stop many people, particularly first time buyers, from being able to buy the house they want. Even though house prices have dropped, many first time buyers still could not afford to buy a house with a loan of only three times their income and without help from their family, many would not be able to build up the necessary level of deposit.

This is of course only at the proposal stage as yet and it is up to the FSA to carry out its own investigation and make recommendations (these are the people who regulated the banks so well!), which could also include secured loans or second charge mortgages. We will let you know any developments as they happen.

Over the course of last year, the regular news was the increasing levels of arrears and expected repossession numbers on homeowner loans and secured loans, due to the effects of the credit crunch and the general economic slowdown.

According to the latest figures to be released by the Financial Services Authority (FSA), this trend is continuing and seems to be getting even worse. The report has revealed that in the three months running up to Christmas last year, the number of homeowner loan arrears cases increased by 68,000, an increase of 13 per cent over the quarter and an increase of 31 per cent over the course of the whole year.

The number of new loan arrears cases had remained relatively stable from the beginning of 2007 at around 54,000 every three months, although the total number of secured loans in arrears has been steadily increasing over this same period to reach a level of 377,000 by the end of last year, this accounts for around 3.37 per cent of all homeowner loans in the UK.

Not surprisingly, the number of properties being repossessed has also seen a dramatic increase since 2007, with a total of 46,750 people losing their homes through homeowner loan arrears and defaults, which represents a staggering 68 per cent increase on the repossession figure for the same period twelve months earlier.

Despite these alarming figures, the number of repossession cases actually fell over the course of the three months to Christmas last year, compared with the previous quarter, although this drop was minimal, with only 436 fewer cases than over the previous three months.