Should mortgage lenders control their own investment policies?

Over the last few years we have seen a significant increase in red tape introduced by governments around the world to curb the mortgage industry. Many of these have been to the detriment of the industry in the short to medium term with the intention of giving long-term stability and far less volatility for investors. However, can you have a free market yet impose what many see as Draconian measures on mortgage lenders?

Human nature

Unfortunately human nature is very volatile with fear and greed paramount not only in everyday life but especially in the investment arena. There is fear that investors are missing out as well as greed when investors see property prices moving further ahead and are determined to squeeze the last penny from their investments. Gordon Brown famously suggested that the era of “boom and bust” was gone but within just a matter of years (if not months) this particular boast was blown out of the water.

The fact is that the successful investors take a long-term balanced approach to their investments and use the volatility of the markets to their own ends. Overbought and oversold positions should be used as a means of reorganising your investments not as a means of chasing risky dreams.

Mortgage lending

It would be easy to suggest that the vast majority of mortgage lenders are responsible and have a long-term view of their business. In an ideal world this would be the perfect situation although unfortunately we do not live in an ideal world!

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As we saw prior to the worldwide crash of 2008, the US mortgage market was overheating, property prices were moving too far too quickly and investors were clamouring over themselves for a slice of the action. As the more secure investment opportunities began to diminish in the mortgage market we saw companies moving further and further down the quality ladder. There was a tremendous increase in sub-prime mortgage business, in effect customers with greater risk, and while traditionally there was potential greater reward here, margins very quickly began to fall. When one of the major sub-prime mortgage companies in the US began to wobble, the industry was shaken and very quickly it became apparent investment in this particular area had been overextended.

Do we operate in a free market?

This is a very difficult question because in reality investment and capitalism only prosper in free markets where there is limited control by governments. However, the property market has a monumental impact upon not only businesses around the world but the vast majority of the population, whether directly or indirectly.

As a consequence, central banks around the world will need to place new buffers to protect us in the future, will need to take a more hands-on approach regarding money market flows and unfortunately this will lead to more and more mortgage restrictions. Historically this has tended to be a short-term situation, a knee-jerk reaction to a recent event, although at the moment we get the feel that this is more of a long-term structural change. It will likely reduce the more speculative area of the real estate market in the short to medium term, it may mean less short-term opportunities to bag a profit but hopefully it will give more structure, more confidence and more security to the real estate sector in the long term.

Conclusion

Some people would argue that if the mortgage sector as a whole had appreciated the responsibilities cast upon it then perhaps we would not be in the situation we are today. In reality this is a little harsh because governments around the world have also tended to feed real estate markets for their own political endeavours. The fact is that human nature is dictated to by fear and greed and as we saw with Gordon Brown’s boast about the end of the “boom and bust era” it is impossible to control these emotions.

So, it looks as though we will have a prosperous long-term real estate industry with an umbrella of protection for investors, businesses as well as worldwide and local economies. We are certainly entering a very different era for the real estate mortgage sector, one which many investors never expected to see. However, reckless lending in the past has put authorities around the world in an impossible position.