Why can’t the mortgage sector regulate itself?

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Earlier this week US data suggested that commercial real estate losses as a percentage of average loan balances increased in the final quarter of 2015. While the figure of 0.14% is up significantly from the previous quarter figure of 0.02% it is from a very low base and in a growing market. Sceptics will suggest that banks are “back to normal” taking additional risk for relatively small margins but it is very dangerous to take figures from one quarter in isolation.

However, it does beg the question, why can’t the mortgage sector regulate itself?

Short-term views

Whether it is an inbuilt mentality within the financial markets or indeed pressure from shareholders and institutions it seems that many mortgage providers do trade on relatively short term strategies. This is one of the main reasons why we saw the US mortgage crash in 2008 because the sub-prime mortgage lenders were getting more and more desperate for profits to bank. We all know how this ended, approaching a decade later interest rates are still at record lows!

It is also worth noting that while regulators do clampdown when required, although perhaps their timing could be better, politicians like to feed the feelgood factor as nothing feels better for the electorate that seeing the value of their home increase. So, are regulators really required to extend commercial strategies and protect the long-term workings of the mortgage market?

Fear and greed

Personal banking is an area in which many large financial institutions find it difficult to make significant returns. Competition in this particular area has been intense for many years and while the introduction of monthly fees is beginning to creep right across the sector it is taking some time to be accepted by consumers. Therefore, the mortgage market and general loan market have become even more important to the banking community. This has increased competition, reduced profit margins in certain areas and forced some mortgage institutions to reverse the recent trend of tighter mortgage criteria.

This may be controversial, but there is no doubt that we will still experience the ups and downs of the mortgage market, some institutions will fall by the wayside and others will merge to reduce costs. Even though Gordon Brown, the former prime minister of the UK, suggested that he would beat the “boom and bust cycle” it is impossible. Much of the momentum behind the boom and bust cycle comes from human emotion and an ever-growing need from the commercial sector to bank short-term profits.

Unfortunately regulators are required

There is no doubt that the mortgage industry could regulate itself, could act more sensibly in the future and restrict the more risky side of the sector but there is always one institution which breaks ranks. Once a mortgage institution breaks ranks from the rest then others have to follow to attract the same level of business and very often it becomes a race to the bottom. The involvement of regulators allows restrictions to be put in place to tackle the investment environment of the time.

So while we may not like it, regulators play a very important role in the long-term viability of the worldwide mortgage sector.

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