Mortgage Market Deregulation and its Consequences

Abstract

One of the key aims of housing policy has been to extend homeownership. This paper examines the role that mortgage market deregulation has played in extending access to homeownership. It also examines its social and economic impacts. Deregulation is characterised as an unfolding process, rather than an explicit policy with identifiable objectives. It is identified as involving the ending of direct controls over building society lending, the opening up of the mortgage market to competition as a consequence of the abolition of exchange controls and the ‘corset’, the creation of a level playing field between banks and building societies, and a shift towards regulatory convergence between banks and building societies. Institutional, social and economic consequences of deregulation are identified. Deregulation led to a much more competitive mortgage market, facilitated the shift of the bulk of mortgages from the mutual to banking sectors and contributed towards the polarisation of the industry between specialist providers of savings and mortgage products and diversified financial institutions. Deregulation widened access to homeownership by widening access to housing finance, but also introduced more risk into the system. However, the risk-choice trade-off has been tilted in the direction of risk by the inefficiency of the supply-side. This has caused many of the benefits of deregulation to be lost in higher house prices. Deregulation also altered the relationship between the housing sector and the economy by making housing wealth more liquid, and this has had important implications for economic management. The pricing out of many people from owner occupation and the importance attached to spreading housing wealth are driving the design of current policies designed to increase homeownership further still.

Keywords:

• Mortgage market
• housing finance
• deregulation

Notes

¹ The scope of the paper is confined to the relationship between the mortgage market and homeowners. The implications of mortgage market deregulation for financing housing associations and large-scale stock transfers, as well as the buy-to-let phenomenon, are discussed in the paper by Gibb & Whitehead.

² Limited re-regulation has occurred since the establishment of the FSA, which was given explicit responsibilities for consumer protection. Concerns about product mis-selling (especially of endowment mortgages) and contracts that were seen by many as being unfair (especially those containing ‘tie-in’ clauses) had already prompted the industry (through the Council of Mortgage Lenders) to introduce a code in 1997. However, momentum in the Treasury, as well as the Department for Trade and Industry (DTI), clearly favoured statutory protection. A standard method for calculating APRs was introduced by the DTI in 2000 and tie-ins were banned. A discussion document on mortgage regulation was issued in 1999 and a statutory code was introduced in 2004.

³ Securitisation involved the sale of bonds secured on a pool of mortgages on the financial markets. It removed the mortgages from the balance sheet of the lender, so allowing it to package new mortgages. The centralised lender usually managed the mortgages in return for a fee.