Commercial or social?

We learn that Northern Rock is coming under fire for being too aggressive in repossessing houses from those who have defaulted on mortgages. They have denied this strenuously.

They stand accused of inflexibly pressing the repossession button too soon, and being twice as likely to evict as other lenders. In the first six months of this year 19,000 homes were repossessed, of which about half were by Northern Rock. (The Council of Mortgage lenders forecasts that by the end of the year 45,000 will have been repossessed, that is an increase to 26,000 in the second half, which was the total for the whole of 2007.) The recession is beginning to bite. Northern Rock report that mortgage arrears have jumped by nearly 60% in the past three months.

Any lender must be careful in repossession, and not just for the sake of those who become homeless. If 125% mortgages were unwisely advanced, there is a fair chance that the resale value will be well below the original value, let alone the value of the advance. Housing prices are falling, house sales are difficult, and the lender will lose in the event of trying to sell houses. It is in their own interest to explore ways of avoiding repossession.

There is, at least by implication, a suggestion that large lenders really ought to be more charitable towards small borrowers, especially at the bottom end of the market. Leaving aside the questions about poor savers or shareholders, and of short sighted borrowers, the question is to what extent commercial organisations should be social or charitable organisations. (Northern Rock may be unusual in trying to pay back a large sum of money to HMG in a strict timetable.

It is becoming clear that Fanny Mae and Freddy Mac, very much involved with the US government historically, succumbed to pressure from President Clinton in 1995 to make more offers available to applicant borrowers lower in the income scale, and applicants inherently more risky. What followed, with sub-prime loans, was one of the main causes, if not the main cause, of our present difficulties.

Governments and charities are rightly concerned about the life chances of the poorer members of society, but the latter would be better served by other means than muddying the boundaries between political and commercial, or else everyone becomes poorer.