Mortgage Regulation

Adrian Bailey Excerpts

Monday 17th January 2011 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I congratulate my hon. Friend the Member for Poole (Mr Syms) on securing this debate on the important issue of the future regulation of the mortgage market. As he said, the FSA is conducting a wholesale review of mortgage regulation in the UK. He and I share the aims of that review. We want to see

“a mortgage market that is sustainable for all participants”

and

“a flexible market that works better for consumers”.

I think we should all be able to agree on those sensible aims.

It is vital to address those issues in the light of the failed regulation of the mortgage market before the financial crisis, when there was a huge expansion in the availability of credit and the number of lenders in the mortgage market. That led to a rapid increase in house prices without an accompanying increase in home ownership, and put more people at financial risk because of the greater debts that were taken on. My hon. Friend was absolutely right to highlight the current low levels of arrears and repossession, but that reflects the low interest rate environment, lower than expected unemployment and, as he pointed out, forbearance by lenders. We cannot be sure that the same conditions will occur in any future housing downturn.

There is a lot of concern about the mortgage market review, but there is also a lot of misinformation. I welcome this opportunity to set out clearly the FSA’s plans for the review. The FSA is conducting the review under the powers of the Financial Services and Markets Act 2000 to meet its statutory objectives, which include market confidence, financial stability and consumer protection. We must remember that Parliament set the framework for regulation, but that the FSA is operationally independent, although accountable to Parliament.

Mortgage lending plays a vital role in ensuring a stable and accessible housing market. As the Minister for Housing and Local Government has set out, it is the ambition of this Government to create a housing market with stable prices that does not exclude many from home ownership. Owning a home is an important ambition for many people in this country. It brings social benefits such as stronger and more committed communities. A flexible mortgage market is important for labour market mobility. Although the link between lending and building is complex, mortgages must be available to encourage the home building industry to provide the new homes that we need. Perhaps most importantly, an open mortgage market promotes fairness between generations and helps to smooth out the differences between the housing haves and the housing have-nots. It allows young people to buy their own homes, which in turn helps older people to trade down as they move into retirement.

However, increased lending can force up house prices beyond the reach of those who want to get on to or move up the housing ladder, putting home ownership further and further out of reach for many people. High prices can cause inequality, indebtedness and inertia, with young people having to take out bigger and bigger debts to buy their own homes or give up on the dream of home ownership.

It is therefore important to strike the right balance. A properly regulated mortgage market is needed to ensure that house prices remain affordable and that consumers are protected. It is worth remembering that consumer groups such as Which?, Citizens Advice and Shelter have warmly welcomed the mortgage market review. Those organisations highlight the number of people they see every day who struggle to make their mortgage payments.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

Does the Minister agree that an important element of financial provision in the mortgage market is diversity? I would welcome his views on possible recommendations by the FSA review that might impact disproportionately on small building societies and restrict such a diverse flow of funds to the market.

[Mr Hoban]

I know that the hon. Gentleman is a keen supporter of financial mutuals. He will recognise that there was a commitment in the coalition agreement to diversity in the ownership of businesses in the financial services sector, and that we are taking action to support mutuals. A mutual should be as safe and sound as a big or small bank. The customers of mutuals deserve the same protection as customers of other financial institutions. I want to see a level playing field in the regulation of the financial services sector, not just the mortgage market.

The boom and subsequent crash in the mortgage market cast doubt on the prudential soundness of lenders, and on their ability to take on appropriate risk. There need to be adequate controls over lending to ensure that the requirements for the retention of capital are proportionate. Without reform of the rules on mortgage lending, banks would need to hold more capital, thus restricting their ability to lend. We do not want lenders to put their solvency at risk through aggressive lending. We are working internationally to agree a new framework of prudential regulation, and capital and liquidity requirements. It is important that all these regulatory reforms are seen as one wide-ranging package to strengthen the stability and sustainability of our financial system and our economy.

I wish to give a few statistics about the mortgage market, to illustrate some of the challenges that we faced during the boom years. The volume of lending was fairly consistent from the early 1980s to the mid-1990s, at about £50 billion a year, but from the late 1990s there was a steady rise in lending, with the boom peaking at £360 billion a year in 2007. Many assume that the rapid expansion in mortgage lending during the boom allowed more people to become home owners, but the rate of owner-occupation actually fell between 2003 and 2008. That may reflect the fact that house prices grew very rapidly from the mid-1990s until 2008, matching the boom in lending, but for many, neither their income nor deposits grew at the same rate. The number of mortgages granted to first-time buyers decreased steadily over the period from 2000 to 2007.

After the boom, mortgage lending fell rapidly from mid-2007 through to 2009, and it remains below peak levels. That reduction reflects a reduction in both demand and supply. Banks now realise that they overstretched themselves and underpriced risk in the boom years, and are therefore increasing deposit requirements and tightening credit checks. On the demand side, household debt is historically high, so people are reluctant to borrow more and add to their debts. People are cautious about the economy and their jobs, and many expect house prices to fall this year.

We know that during the boom, a huge proportion of mortgage lending—about 40%—was for remortgaging. In 2007, of the £360 billion in gross mortgage lending, £150 billion was for remortgaging. Surveys suggest that about 60% of remortgages also entailed equity withdrawal. Although mortgage lending for house purchase has reduced to some extent since then, the 72% fall in remortgaging has made the most significant contribution to the fall in gross mortgage lending over recent years. With interest rates at historically low levels and house prices flat, there is little incentive for borrowers to release equity or switch their mortgage.

I acknowledge that the reduction in mortgage availability has hit everyone hard, particularly first-time buyers. The proportion of first-time buyers reliant on help from friends and family to put together a deposit has reached 85%, compared with 45% in 2006, which is not an equitable or sustainable state of affairs.

I turn to the details of the mortgage market review. In October 2009, the FSA published a discussion paper setting out its high-level objectives for the review. That has been followed by a number of discussion and consultation papers over the past year. In the course of the review, the FSA has produced a range of options and proposals for consultation and consideration, and it is considering the responses carefully and will publish further proposals later this year. Nothing is set in stone. The FSA has made it absolutely clear that it will assess fully the potential impact on the market before implementing any rule changes. Later this year, it intends to publish an impact assessment that will take into account the cumulative impact of all its final proposals.

The FSA is also committed to ensuring a smooth transitional period, to minimise the impact of changes and keep the mortgage and housing market stable. It has made it clear that it will not implement any rule changes until the market is back on a stronger footing. Its review process is an ongoing consultation, and it is important that all interested parties engage constructively in it. I encourage everyone with an interest in the debate to do so.

I shall respond to some of the points that my hon. Friend the Member for Poole made. Traditionally, self-certification was a route for the self-employed to take a mortgage, but that has been abused by people for whom the scheme was not designed. The FSA’s proposals would required greater disclosure by the self-employed. For example, a borrower could submit their tax returns to prove their historical income, giving lenders better information on potential borrowers and enabling them to assess risk, and therefore price, more accurately.

As I set out earlier, in the run-up to the crash many first-time buyers were frozen out of the market. My hon. Friend the Member for Nuneaton (Mr Jones) highlighted the fact that the low loan-to-value ratios that we see today act as a barrier to those who want to get on to the housing ladder. Those ratios are a response to the crisis, not the MMR. The MMR’s emphasis on affordability should help in the long run to create a stable market with stable house price growth, which will bring home ownership within the reach of many more people.

The MMR should have no impact on the shared equity sector, as there is no in-built prejudice against it, but again, borrowers will need to demonstrate that they can afford to pay both the mortgage and the rent.

My hon. Friend the Member for Poole also raised the issue of European proposals on mortgage lending. He is right to say that the Commission intends to publish proposals on responsible mortgage lending and borrowing in the coming months. The Treasury and the Financial Services Authority have held a number of discussions with the Commission on those proposals, and we expect them to be broadly consistent with the principles of mortgage regulation in the UK. However, the FSA has acknowledged that it will need to consider that European initiative as it refines its proposals. It will ensure that the timetable for refining the MMR is consistent with developments at European level.

It is clear that mortgage regulation failed by allowing an unsustainable boom in lending and increasing house prices, followed by the inevitable crash. We do not want to see that repeated. We have a clear objective to create a sustainable and accessible housing market that sees a gradual rise in prices in line with people’s salaries. The mortgage market is a key part of creating that, but unregulated lending will not help us to achieve that aim. The MMR is an essential step to ensure that both consumers and lenders are protected, but that will always be balanced with the need to ensure innovation and competition in the mortgage market. The FSA will take a proportionate and balanced approach in order to help to build a stable and sustainable mortgage market for the future.

Question put and agreed to.

Comprehensive Spending Review

Adrian Bailey Excerpts

Thursday 28th October 2010 Commons Chamber

[Danny Alexander]

The right hon. Gentleman is certainly right to say that at the end of the spending review public spending will be higher in cash terms than it is at the moment. In real terms, it will go back to the level of about 2008-09, and in terms of a share of gross domestic product to about the level of 2006-07. People need to be realistic about the scale of what is being proposed. The big gainer from the huge deficit that Labour left us with was the department of debt interest, and unfortunately it is the cost of debt interest that we have to meet.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

Will the Chief Secretary give way?

[Danny Alexander]

I will give way one more time, and then move on.

[Mr Bailey]

The right hon. Gentleman has put great emphasis on the debt that he inherited and the need for the Opposition to be responsible. Given that the greater part of that debt was incurred in bailing out the banks and supporting manufacturing industry, could he be responsible and tell us what he would have cut in that position?

[Danny Alexander]

We have set out in detail what we would cut—that is the whole point of the spending review.

Finance Bill

Adrian Bailey Excerpts

Tuesday 6th July 2010 Commons Chamber

[Jacob Rees-Mogg]

The hon. Gentleman is absolutely right about the problem of unemployment in the 1930s, although the situation began to recover in the United Kingdom considerably earlier than in the United States. I accept that in the United States, rearmament led to recovery, but I suggest that in the United Kingdom the recovery resulted from coming off the gold standard and the boost to trade that that provided.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

Will the right hon. Gentleman give way?

[Jacob Rees-Mogg]

The hon. Gentleman has promoted me, but I will give way for the flattery.

[Mr Bailey]

I am sure it is only a matter of time.

Does the hon. Gentleman acknowledge that the diminution in unemployment that took place in the 1930s was largely a result of Government public spending, particularly on public sector housing?

[Jacob Rees-Mogg]

I think that Neville Chamberlain managed to balance the budget, so we had a Chancellor who was a Conservative doing quite a good deal of work in the 1930s. However, we may be getting a little abstruse and far away from the 2010 Finance Bill.

Budget Resolutions and Economic Situation

Adrian Bailey Excerpts

Thursday 24th June 2010 Commons Chamber

[Chris Huhne]

Before Opposition Members start chortling away, let me say that my hon. Friend makes a very good point. I would merely remind Opposition Members which Government raised council tax so steeply—the most regressive tax in the entire toolkit. Year after year under a Labour Government it was pushed up and up and up.

Let me now turn to the issue of growth and jobs. At this stage in every business cycle that I have followed, going all the way back to the recovery from the bust that followed the Barber boom in the early ’70s, the cry always goes up, “But where will the jobs come from?” That cry is particularly urgent whenever, as has too frequently happened, Governments are trying to deal with the legacy of past fiscal misdeeds. However, the forecast from the Office for Budget Responsibility is a reasonable central assessment and is similar to independent forecasts. It shows that the biggest impetus to growth this year comes, as is usual at this point in the cycle, from the inventory cycle. Recessions inevitably put businesses under enormous financial pressure. Businesses try to raise cash by cutting output and by meeting the demand for their goods from stocks, but that process has to exhaust itself as those stocks of finished goods run down. More of the demand for those goods then has to be met from output, and businesses once again gear up production. That is where we are today. The inventory cycle is a powerful stimulus. The OBR forecast has it contributing 1.2% of gross domestic product this year.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

Let me take the right hon. Gentleman back to his defence of his party’s volte-face on VAT. He explained that VAT was not a regressive tax because of the range of exemptions from it. Will he tell us what exemptions there are now under the coalition Government that were not there before that make it less regressive than it was before?

Economic Affairs and Work and Pensions

Adrian Bailey Excerpts

Tuesday 8th June 2010 Commons Chamber

[Mr Darling]

I am grateful to the hon. Gentleman for accepting what is obvious: the fact that during a recession Governments do have to borrow in order to support their economies. However, I should remind him that during the earlier part of the previous decade the Conservative party supported our spending programmes, saying that they would stick to our spending levels. The Prime Minister, when he was Leader of the Opposition, said that as recently as 2008. The hon. Gentleman was not here during the previous Parliament, but I can assure him that I do not recall any Conservative standing up to say, “Don’t build a new school in my constituency. Don’t build more housing. Don’t open a new hospital.” Conservative Members were not saying that at all; they wanted more spending in just about every area. So the idea that the Conservative party was behaving in a way that would have meant that there was no borrowing and that the Conservatives would have behaved any differently is absolute nonsense. The hon. Gentleman just has to accept that.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

Does my right hon. Friend agree that some of the measures that have now contributed to the deficit were being demanded by manufacturing industry in order to sustain the corporate manufacturing base needed for us to grow out of recession, the car scrappage scheme being one case in point?

[Mr Darling]

I agree with my hon. Friend. The new Government will find that for every industrialist or manufacturer who says that public spending needs to be cut, in areas that benefit from such spending people take a rather different view. The car scrappage scheme is an example of that, and it made a huge difference to the car industry and the motor vehicle industry in general. As the hon. Member for North West Leicestershire (Andrew Bridgen) said, the action that we took did involve more borrowing and it does result in increasing debt. However, the point is that the cost of failing to act would have been far greater.

The Chancellor was talking about the international consensus. I know something about that, and I can tell hon. Members that over the past three years it was very much in favour of our continuing to support our economies; of course, as we come through to recovery we have to get the borrowing down. Nobody disputes that, and at least two of the parties that fought the previous election were absolutely clear about it—it was never clear what the third party was in favour of, and its position remains something of a mystery even today.

--- Later in debate ---

[Mr Osborne]

I am probably going to regret this, but I am quite attracted to the idea that my hon. Friend has proposed, not just in the Chamber today but to me privately; I think he has also written about it. The key thing that he proposes is that Select Committees should be able to recommend reductions, rather than increases, in Government Department budgets. I would certainly welcome that if we were ever to proceed in that direction.

I honestly mean it when I say to my hon. Friend that I am attracted to his idea. I will come back to him and see whether we can take it forward. Obviously, it would be the collective decision of the Government, rather than mine alone. My hon. Friend is right to say that we are trying to get away from it simply being the Treasury that conducts the spending review, imposing its decisions on everyone else.

I believe that when Tony Blair was Prime Minister, he and the right hon. Member for Kirkcaldy and Cowdenbeath would simply agree a total. Every Secretary of State would then receive the number in an envelope, before it was announced to the press about 20 minutes later. We are going to have a more collegiate approach and we are genuinely seeking to engage as many people as possible—the brightest civil servants across all the Government Departments and the best people from the devolved Administrations, pressure groups, independent think-tanks and front-line public services. There will be a Cabinet committee to chair and oversee the process and its membership will be restricted to those Cabinet Ministers with very small budgets of their own. Other Cabinet Ministers will be eligible to be members of the committee once they have settled their departmental allocations. That will create an incentive structure within the Cabinet.

Finally, over the summer we are going to conduct a wide public engagement exercise so that the whole country has a chance to get involved. We have already begun to implement the most radical transparency agenda that the country has ever seen. The hon. Member for West Bromwich East (Mr Watson) and I were talking earlier about the £25,000 disclosure limit for central Government expenditure. The previous Chancellor refused my freedom of information request to publish the Treasury’s combined online information system, or COINS, database of public spending. But the current Chancellor of the Exchequer has accepted that request and the raw data in the COINS database are now available online.

[Mr Bailey]

rose—

[Mr Osborne]

I will give way on this point, if the hon. Gentleman likes, but just let me say this. We have published the database as quickly as we have been able to. By August, we will be able to publish a more user-friendly version of the data; the current version is quite difficult to operate. We need a couple of months to get the computer software to enable people to search the database.

[Mr Bailey]

In his list of those who would be consulted on the budget cuts, the Chancellor omitted to mention manufacturing industry. Will he undertake to talk to representatives of manufacturing industry about his proposals on investment allowances, as portrayed in the run-up to the general election?

[Mr Osborne]

My team and I are in regular discussions with manufacturing industry, representatives of which were vocal supporters of our proposals during the general election to avoid the jobs tax.

Let me conclude by saying that all parts of government and society—and all parts of this Parliament, if they want to take the opportunity—will have a chance to make their voices heard. This is the great national challenge of our generation. After years of waste, debt and irresponsibility, we have to get Britain to live within its means. It is time to rethink how the Government spend our money. We did not choose the terrible economic situation that we inherited; the Labour party chose that for us. But we can work to put it right—deal with our debts, set our country on a brighter economic course and show that we are all in this together. I commend the Gracious Speech to the House.