Mortgage regulation


According to The Independent, one million might be frozen out of the mortgage market. Concerns stem from the fact that financial authorities look set to ban banks from offering mortgages to people who cannot prove their income.

Essentially, the FSA wants to prevent banks doing business with people who can’t prove that that they will be able to pay off their loans. Such regulation is apparently intended to prevent another credit crunch. As Jon Pain, FSA managing director of supervision, explains to The Independent, “nearly 'half' the mortgages advanced prior to the advent of the credit crunch were either self-certification or fast-tracked, meaning borrowers were able to obtain loans without providing any evidence that they could afford to pay them back."

On the one hand, that sounds fair enough. We don't want another financial disaster. However, the intervention of the FSA could be rendered unnecessary simply by letting the market rule. No sensible bank would ever do business with anybody if there was not a decent chance of getting money out of the deal. So why is this regulation necessary? Maybe it’s because the danger of doing risky business has disappeared due to the government's taxpayer-funded bank bailouts. Indeed, I think this is most likely to be the case. The bailouts have made it utterly clear that if you are a bank (especially if your name is Lloyds) then the natural relationship between risk and possible outcome is no longer valid.

As such, the intervention of the FSA is a perfect example of how government intervention leads to market failures and even more regulation.