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Self-certification mortgages have endured a rollercoaster ride over the last few years. It seems only yesterday they were hailed as an innovative product and a Godsend to millions of self-employed workers who failed to reach the requirements of standard home loan products. Now they are considered a pariah, have been labelled “liar loans” in the United States, and have been widely condemned as one of the main contributors to the credit crunch and resulting global recession.
Although self-certs were never intended to be made available to the wider home owner market, and were introduced to the world with stringent lending criterion, they soon became the first choice product for anyone who wished to keep their true earnings details a secret. The abuse of self-certs then became widespread and lenders failed to notice, or chose to ignore, the fact that they were adding a dangerous percentage of risky mortgages to their loan books.
And why not? Times were good, people were keeping up with the repayments on their mortgages, and property prices were constantly rising thus ensuring that people who took out high loan-to-value home loans soon had sufficient equity in their properties – at least on paper –for lenders to count these customers as low-risk. The self-certification mortgage market was, in short, a money-making machine, and with inflation chugging along at an acceptable rate it seemed as though it could last forever.
People that could have never before dreamed of owning a home were now being approved for mortgages en masse and freeing themselves from the rental cycle while bankers received record bonuses. Politicians were declaring that the boom and bust cycles of old were no longer relevant and that people could look forward to decades of steady employment, steady inflation, and home ownership. A Golden Age had truly arrived – or so it seemed until it all went horribly wrong.
When inflation eventually started to rise at an unacceptable rate the Government was forced to increase interest rates to curb spending. Many home owners were then subjected to higher monthly mortgage repayments and that is when the cracks began to appear in the gold of the apparent Golden Age. Home owners on variable rate mortgages who had previously borrowed as much as they possibly could in order to buy the biggest property they “could afford” were suddenly unable to make their monthly payments and began to appear as bad debtors on their banks' loan books.
The increasing percentage of bad debt on these loan books meant that they were becoming difficult to sell to other financial institutions. This in turn led to a situation in which lenders were unable to find the new sources of funds they needed to offer more mortgages to home owners and prospective home buyers, and the system reached a stand still. Investigations into the likely causes of the toxic loans uncovered a horrible truth about self-certification mortgages – they were abused to a large extent due to the lack of evidence required to apply for this category of home loan product. Self-certs had been found out while the mortgage market was turned upside down.