COMMENT
KEVIN PATERSON
SALES AND MARKETING DIRECTOR
ASSURANT INTERMEDIARY
Brits repaid a record £8bn of mortgage debt in
Q4 2008, a far cry from the equity withdrawal
trend of previous years. In fact, the same period
in 2007 saw a net equity withdrawal of £6.7bn –
and this was down from the peak in Q4 2003 when
we collectively released a massive £17.2bn. That’s
a huge turnaround in five years.
But it seems that we are damned if we do
and damned if we don’t in this regard. The
government wants the best of both worlds. On
‘‘
one hand it preaches prudence and saving and on
the other it has its head in its hands because we
are not spending enough to keep the high street
boom going.
When markets were rising and house prices
were on their seemingly unending northward
march, many consumers were tempted by cheap
interest payments and the perception of wealth
in my opinion
A sensible approach to borrowing along with more realistic house
prices could end the boom and bust cycle – until a young City type
comes up with a clever way of making a fast buck again
In uncertain times it seems
it is our natural instinct
to save our money and
reduce our debt exposure
that the inflation in the value of their properties
brought.
This allowed them to release significant sums
from their properties for large purchases,
fuelling a boom on the high street that fed into
the wider economy.
Although this went on for a long time it was
ultimately never going to be sustainable. Now,
house prices have fallen by more than 20% and
may decline further, which means the equity pot
many home owners enjoyed and previously
tapped into has disappeared.
In uncertain times it seems it is our natural
instinct to save and reduce our debt exposure,
which must be a good thing.
The utopian situation of a healthy
balance between debt and savings is
something that has eluded
governments for
more than a
www.mortgagestrategy.co.uk
Saving our way out of a vicious cycle
26
century and there has never appeared to be a
simple way of achieving it.
Of course, when Labour came to power it
promised to end the boom and bust cycle typified
by the previous Tory administration, and for its
first term we almost believed it.
But then the economy didn’t so much bust as
implode with a mighty roar, leading many to
believe that boom and bust is the only way our
economy can operate. There is a growing
acceptance that every eight years or so we must
have a recession.
But there could be a better way. We could be
entering a period of austerity, with tighter
controls on borrowing and lower levels of
liquidity all backed up by the ability to repay
debt. This really could bring the boom and bust
cycle to an end.
It seems to me that making borrowing harder
coupled with stabilising house prices at a
realistic level in relation to affordability would
be no bad thing.
The economic situation could improve – until
some City whiz kid, too young to remember the
precipice we fell off in 2007, comes up with a
clever new way of making money.
Time to expose the silent scandal of actuarial blunders
In my 26 years in this industry I have worked
through some tough periods including a couple
of recessions and several wars. But one
ongoing crisis has gone largely unnoticed –
that of actuarial blunders.
For years, brokers have borne the brunt of
criticism from governments, regulators and by
association the general public after a number of
financial scandals.
There are a few of these to choose from. The
1970s and early 1980s saw the early days of
equity release which was fine until the market
faltered. Mis-selling was diagnosed.
Later in the 1980s we had the endowment
mis-selling scandal, in the 1990s it was the
pensions mis-selling scandal and more recently
you can take your pick of scandals ranging from
payment protection insurance to precipice
bonds.
In some of these cases the criticism the
financial services industry received was
justified but in some cases it was not.
For example, the pensions mis-selling issue
was a travesty. The industry was left holding
the baby after a monumental screw-up by
government actuaries designing the national
pensions regime. True to form, it was brokers
who got most of the blame.
But the tide may be about to turn. It seems
that for the past four years the Financial
Services Authority has been fighting a legal
action to keep information secret relating to
those insurers who mis-used the old Life
Assurance Unit Trust Regulatory Organisation
projection figures to work out premiums.
This resulted in many customers being given
unrealistic projections for their policies. Claims
for compensation met by the advisers who
wrote these policies are being challenged.
Advisers are angry that unrealistic projections
led to mis-selling payouts that would not have
been made had the projections been correct.
So for years I have maintained that actuaries
were to blame for the endowment issue. These
supposedly highly qualified professionals go to
university for years to learn how to guess
accurately but the moment the market doesn’t
go the way their text books say it should they
are revealed as no better than the rest of us at
guessing.
In the late 1980s I worked with an insurer
that revalued its 25-year projection figures
three times in two years. Consequently, many
clients revalued too cautiously and claims for
mis-selling were triggered.
I have no idea why the FSA is fighting this.
You’d have thought the regulator would have
learnt a lesson from the recent crisis – that
brokers are not always the villains of the piece
and it sometimes pays to look elsewhere.
MORTGAGE STRATEGY April 6, 2009
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