Picking up the pieces of the boom in Liar's Loans

OF THE many causes of our current misfortunes, the sub-prime mortgage bubble and the rise of "Liar's Loans" - officially called "self-certification mortgages" - featured prominently.

These were home loans where borrowers wrote in their own incomes. Their popularity was iconic; their abuse a catastrophe.

A home loan application system designed to help the self-employed and those deemed sufficiently well off as to not require conventional financial vetting flew right off the rails. Yesterday the Financial Services Authority announced that from 2011 - four years after the global financial crisis that brought the banking system to the brink of meltdown - Liar's Loans will be banned.

This is a small but important milestone on the long road of financial retrenchment and reform. Liar's Loans were symptomatic of a much more widespread malaise in the financial system: standards were lowered, corners cut and rules ignored to fuel the biggest lending spree of modern times.

Since the inevitable crash, hundreds of specialist mortgage products have been withdrawn and many mortgage brokers have gone under - or been fined and shut down by the FSA. Barely a week passes without news of yet another firm being penalised or closed for reckless or fraudulent lending behaviour.

And as wholesale funds dried up and lenders shrank back in horror at the prospect of a tumultuous surge in mortgage arrears and defaults, Liar's Loans have gone from a deluge to a trickle.

While their abuse in the UK was not as widespread or as flagrant in the US, there were many horrendous cases where mortgage providers and house buyers colluded in a systematic evasion of long-standing prudential lending yardsticks. This resulted in thousands of applicants being granted an inflated loan, mortgage brokers getting commission, house prices booming and the economy continuing to give off an illusory glow of health and wellbeing.

Liar's Loans were by no means the sole or even the major cause of the debacle that ensued. But they were symptomatic of so much that went wrong in a financial industry of which the UK had once been proud. The writing up of fictional incomes, the statement of assets that didn't exist and the falsification of circumstances gravely distorted the housing market, and through that market, the general economy.

Almost half of all new mortgages between 2007 and the first quarter of this year were given without the borrower having to give proof of their income. Now the FSA wants new affordability tests for all mortgages, with lenders ultimately responsible for assessing a consumer's ability to pay. It says the rules will protect vulnerable customers with impaired credit records.

But already industry "experts" are wringing their hands and warning that lenders could pass the extra costs onto borrowers and freeze more people out of the housing market, "putting the fragile recovery in jeopardy".

What a distortion of the state we're in.

It is the cost of reckless lending that is now being borne by everyone. And was it not excessive lending and borrowing that put the entire economy in jeopardy in the first place?

A long period of at best stagnant house prices is the inevitable consequence of a borrowing boom that had got out of hand. The cure should not at all be confused with the abusive disease. Not for nothing is it called a correction..