Among the consequences is that it could slow or even prevent an economic recovery. See the Low Inflation Trap.
No politician wants that.
It would be a good idea to hire IngramSure (UK) Ltd to explore other options with your leading bankers, financial regulators, economists, central bankers, and other experts. This Blog has at least one page for most of those concerned.
Most of the public, real estate agents, and financial advisers to whom I have spoken think my ILS Mortgages and my related 'Wealth (protection) Bonds' would be very welcome in the market place. But I do not have the resources to deliver them without help from the likes of you or a business partner.
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The IMF stated in its latest Country Report for the UK that long term UK house prices have averaged 3.5 times income,whereas at present they are at 4.5 times income on average.
http://www.imf.org/external/pubs/ft/scr/2012/cr12190.pdf
HIGH COST
When people look for a house they are hard pressed to afford the mortgage, but they are competing with each other so they commit as much of their income as the lender says they can afford. Say 30% of income for 25 years. If it stayed at 30% of income for 25years, they may not be able to afford all of their other commitments, like education for the children, holidays, a pension, and just paying all of the bills. This is not good politics.
http://www.imf.org/external/pubs/ft/scr/2012/cr12190.pdf
HIGH COST
When people look for a house they are hard pressed to afford the mortgage, but they are competing with each other so they commit as much of their income as the lender says they can afford. Say 30% of income for 25 years. If it stayed at 30% of income for 25years, they may not be able to afford all of their other commitments, like education for the children, holidays, a pension, and just paying all of the bills. This is not good politics.
HIGH RISK EXPOSURE
When
the traditional Level Payments (not ILS) mortgage model is offered, people do not know what the cost will be
next year, never mind in three years’ time. It can rise far above that 30% of
income if the mortgage size was too large when they started. More commonly,
people rely upon rising incomes to ease the cost for them. In a recession or a
depression incomes do not rise much. That is not good politics.
TOO LITTLE FOR HOUSING
In
a rapidly growing economy incomes can rise very fast but interest rates tend to
be higher so mortgages can be too small
to develop the housing sector and governments tend to spend money giving
subsidies which might not be needed with an ILS Mortgage. Too few houses or too little money left over to develop other things is not good politics.
And these are the least of your worries. If the traditional mortgage model creates a housing crisis you get all kinds of difficulties all over the economy.
And these are the least of your worries. If the traditional mortgage model creates a housing crisis you get all kinds of difficulties all over the economy.
HOW IT WORKS
I
selected a 4% p.a. easement of the payments has been adopted for my standard ILS Model because I have observed
in the UK that people seem able to cope with their mortgages if incomes are
rising at around 4% p.a. despite the cost of their traditional mortgages rising and falling
over time.
So
I have suggested to the regulators that they adopt a standard of this sort, as
you can see from the preceding page on this Blog. This means that the initial payments, the entry cost, should be around 8.5% p.a. of the mortgage sum
borrowed, and lenders should then be able to ease the cost by 4% p.a. every
year over a 25 year repayment period.
As
mentioned above, this will support house prices of an average 3.5 times income in value in the UK,
but not the present average value of 4.5 times income.
HELPING THE ECONOMIC RECOVERY - IN PRACTICAL WAYS
Just now, this
is a problem for everyone, because property prices are still too high to be
easily supported. It is a problem, especially for bankers and for governments
trying to keep the banking sector healthy. This situation makes banks very vulnerable. And it is a problem for people wanting
to buy, and feeling that they might be better to wait until prices have dropped
further. People are afraid that interest rates will rise and that this will
affect their mortgage costs, pushing them up beyond reach and at the same time
dropping the value of the house that they bought. That is natural. They have
seen what happens when interest rates rise. Other people are afraid to spend as they know their property is falling in value and the economy is weak.
This table tells the tale:
Source: Edward C D Ingram Spreadsheets
This table tells the tale:
 |
| The left hand table shows how rapidly monthly costs can rise and how rapidly property values can drop when interest rates rise. This does not apply to ILS Mortgages which are very safe and stable. |
ALL
OF YOUR CONSTITUENTS ARE HOPING FOR BETTER TIMES ASAP:
Here is a suggestion – manage the regulators and ask them to allow a larger Fixed Cost / Defined Cost ILS Mortgage onto the market – say 4.5 times income, at 2% true interest, or somewhere around that figure to be in line with the market at present. With economic conditions being so depressed, this 2% true interest rate is probably a higher rate of return than pension funds can get just now and certainly more than people can be obtain easily from savings accounts.
Here is a suggestion – manage the regulators and ask them to allow a larger Fixed Cost / Defined Cost ILS Mortgage onto the market – say 4.5 times income, at 2% true interest, or somewhere around that figure to be in line with the market at present. With economic conditions being so depressed, this 2% true interest rate is probably a higher rate of return than pension funds can get just now and certainly more than people can be obtain easily from savings accounts.
A
4.5 times income mortgage at 2% true interest could buy a house at current prices. It will have an easement of 2.48%
p.a. - or about 1.5% p.a. less than I designed the ILS System for, but this will be affordable for many people. Especially the younger ones on rising income paths. And remember, the actual cost
will be guaranteed (defined) to ease by exactly 2.48% every year. Read the earlier pages to know the precise meaning.
Whether pension funds would offer 2% true interest for 25years is doubtful, but they may. They may be more willing to offer 10 years and after that they would offer a new true rate of interest or the lender would find a new source of funds for the borrowers. By the end of 10 years, the mortgage will be smaller, and the monthly payments will have eased considerably to under 24% of income, for most people.. So a higher true interest rate and a slower rate of easement will be manageable.
A THREAT TO ECONOMIC RECOVERY
Compare doing this with borrowing the same amount using the traditional system and finding that interest rates are reaching for 6% and more by then. There might be a new avalanche of broken homes and failing banks. The economic recovery might abort just to save them. Then inflation may take off taking interest rates up and producing the very crisis that it was hoped to avoid.
Whether pension funds would offer 2% true interest for 25years is doubtful, but they may. They may be more willing to offer 10 years and after that they would offer a new true rate of interest or the lender would find a new source of funds for the borrowers. By the end of 10 years, the mortgage will be smaller, and the monthly payments will have eased considerably to under 24% of income, for most people.. So a higher true interest rate and a slower rate of easement will be manageable.
A THREAT TO ECONOMIC RECOVERY
Compare doing this with borrowing the same amount using the traditional system and finding that interest rates are reaching for 6% and more by then. There might be a new avalanche of broken homes and failing banks. The economic recovery might abort just to save them. Then inflation may take off taking interest rates up and producing the very crisis that it was hoped to avoid.
In the above example, a loan of 4.5 times income is granted at 2% true interest. If, instead of a 2% true interest rate as just illustrated, the true rate of interest were to be 1%, the rate of easement would be around
3.48% p.a. reducing the cost to income from 30% to about 21% of income after 10 years. It helps a lot.
WHO WOULD LEND AT 1% TRUE?
A government might be able to borrow at that rate of interest and offer the money for lending. Borrowing to support housing may be more cost effective than borrowing to support failing banks with holes in their pockets caused by weak property prices and unemployment. This might plug that hole in the banks' pockets. The strength given to property prices would support the banks and keep them from further draining the government's resources and it would make them more willing to lend to get the economy moving again.
That is the ideas, whether the lending comes from pension funds, deposits and savings, or from government borrowing - from the UK please, not from elsewhere.
WHO WOULD LEND AT 1% TRUE?
A government might be able to borrow at that rate of interest and offer the money for lending. Borrowing to support housing may be more cost effective than borrowing to support failing banks with holes in their pockets caused by weak property prices and unemployment. This might plug that hole in the banks' pockets. The strength given to property prices would support the banks and keep them from further draining the government's resources and it would make them more willing to lend to get the economy moving again.
That is the ideas, whether the lending comes from pension funds, deposits and savings, or from government borrowing - from the UK please, not from elsewhere.
The
alternative faced by your constituents would be to rent a property, which
almost always costs more, (see the ILS Mortgages for Borrowers page), and renting does not give security of
tenure. Ask your researchers this: are there many votes to be won by helping people to buy their own homes, or by getting the house building industry moving on a more sustainable basis?
SUMMARY
Doing this (stretching the ILS System) will bring a lot of buyers into the market and that might settle property prices and create significantly more security in the banking system which is still very vulnerable while property prices remain weak.
FASTER ECONOMIC RECOVERY: I
would expect the outcome to be more security for pension funds and for people
buying homes and for banks, leading to a faster economic recovery in the UK.
After recovery, the whole economy will be easier to manage and your constituents will be much more comfortable with ILS Mortgages than without. This is the conclusion reached by all of my banking supporters and actuaries and it is explained throughout he pages of this Blog.
After recovery, the whole economy will be easier to manage and your constituents will be much more comfortable with ILS Mortgages than without. This is the conclusion reached by all of my banking supporters and actuaries and it is explained throughout he pages of this Blog.
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