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Unwinding asset and credit bubbles : Comments
By Henry Thornton, published 19/3/2008The bail-out of Bear Stearns by JP Morgan represents a new milestone in the great credit crunch of 2007-08.
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I believe the rule of 25% limit for housing was a yardstick applied by the banks. I do not think it was in any way enforced by the government. In many cases income is a very rubbery figure, especially among the self-employed.
The borrower is the best judge of whether the loan is affordable or not. You wouldn’t really want the bank to determine that for you. The banks determine whether the individual’s situation ie the ability to repay puts them at greater risk.
I do think that the ability to sell the mortgages by the use of CDOs did encourage banks to ease their lending restrictions because they thought they had sold off the risk as well. I’m sure that if CDOs ever make a comeback, the buyers will be more wary and they will be harder to sell.
In your other comment you blamed investment in housing and negative gearing as the cause of current mortgage stress.
The current shortage of rental accommodation that is driving up the price of rents would argue against your point of view. Rental accommodation is primarily provided by investors in housing, and the provision of negative gearing offsets the drawback of low yields and low liquidity in this market.
I maintain that mortgage stress is more likely a factor of unrealistic expectations of the buyers. It is simply logical that a more modest ie a cheaper house provides less mortgage stress than a dearer one. Also these days a house comes with all the fittings, whitegoods, and two newish cars in the double garage. Surely the prime responsibility of the borrowers is to determine whether they are risking the welfare of their family with the new loan?