Monday, 13 August 2007

The Debt Disaster: It was the mortgages wot dun it

"Those who lend money without charging interest, and who cannot be bribed to lie about the innocent. Such people will stand firm forever." Psalm 15:5

Reading the news about the crisis in the global markets at the end of last week gave me a slight glow of satisfaction, not because I enjoy seeing other people suffer, and certainly not because I believe capitalists have always 'got it coming to them', but because someone had explained to me a few weeks ago what was going to happen, and as events unfolded it was nice to feel I had a vague understanding of what was going on.

Everyone will have noticed the constant mention of 'sub-prime' mortgages, and many people will now know what this means: lending money to buy a house to people who might very well not be able to pay you back.

But why, you might ask, would anyone do such a thing? You can understand why they'd lend to people who can pay them back, but why lend to those who might well not?

The answer is that the system is not just about making money out of mortgage repayments. The system doesn't stop with the bank or building society giving money to someone and taking interest from them.

Rather, mortgage deals themselves become 'saleable' assets, which are then traded with the seller making money on the deal. But what happens when the supply of mortgage deals begins to dry up because everyone who reasonably can take out a mortgage has done - when the supply of 'prime' mortgages is diminishing? I think you might be able to guess!

Just in case you haven't, the answer is you open up new mortgage markets with deliberately generated 'sub-prime' mortgages. However, a sub-prime mortgage is, obviously, a risky deal. Indeed, some of the deals are apparently very risky indeed. Selling-on the mortgage as an asset then becomes like what used to be called 'Northern Irish Pass-the-Parcel'. No one wants to be stuck with a ticking bomb when the music stops - except (and this is where it gets tricky) if everyone is convinced the parcel is not a bomb at all, that it is in fact a package of 'prime' mortgage deals. Then the game continues blithely on.

Or at least, it does until someone, somewhere, for whatever reason, unwraps the parcel. In marketing terms, this simply means someone who wants to realise their 'assets' tries to do so. Then they may discover that what they've bought isn't actually worth anything - unless they can sell it to someone who doesn't know it isn't worth anything: someone as ignorant as they were when they bought it.

But, hey ho, you have a problem, because the wrapping is off the parcel.

That, in a nutshell, seems to be what has been happening. I suppose the thing to watch will be the American markets. Meanwhile, I can't help thinking, "If only we'd listened to God a bit more, or maybe even just CS Lewis."

Just to stoke up the pessimism a bit more, read here.

No comments will be posted without a full name and location, see the policy .


  1. (Chelmsford)

    I'm sure these sub-prime mortgages are a risky innovation. But that by no means implies that there is anything wrong with properly secured mortgages for the intention of buying a house.

    Yes, if mortgages were no longer easily available, that would reduce the amount of debt and reduce house prices. But it would also mean millions of people sleeping on the streets of Britain, and dying of exposure. Is that what you want? If you don't, what is your alternative policy for making sufficient homes available?

    For more of my thoughts related to this, see this post, to which I was expecting you to respond.

  2. I was not aware that, prior to the development of the mortgage system, so many people died of exposure because they could not afford to put a roof over their heads.

    That presumably explains the population explosion coinciding with the arrival of the mortgage.


  3. Darren Moore (Tranmere)16 August 2007 at 11:37

    The previous owners of the house where I live bought the house just before the war. They weren't wealthy so 2 families bought it. As they did better and saved one family moved out. I think one was a docking family the other an artist.

    In my family, pre-war families lived together until they could afford to rent or buy. Most of them were market traders or builders. So they helped each other in good times and could ask for help in bad.

    That would be one way of living in a non-mortgage culture. But that would mean families and freindships would have to function better than they do now.

    Darren Moore (Tranmere)

  4. John, I appreciate your smiley. But there is a serious point here. Before mortgages were available the mass of ordinary people lived in appalling conditions, if not completely on the street where quite a lot did die from exposure. Read some Dickens. Over the last century there has been a huge improvement in housing conditions, and one of the main driving forces of this has been the availability of mortgages. Take away that availability and it will no longer be economic to build new houses, while old ones continue to decay. Over time we will be back in the Dickensian era, with most people living in half ruined old houses or in shacks they have built for themselves.

    Do you want to go back to the poverty of the Victorian and earlier eras? That is what will happen if we demolish the financial basis on which we pulled ourselves out of it.

    (still in Chelmsford)