Monday, April 21, 2008

Crunchy... and sticky

I've just been reading this analysis on the BBC news site, written last Tuesday by economics expert Stephanie Flanders.

I'm no economics expert - I do not understand all the complexities involved in this issue, but I want to understand the gist of it, because this problem is about more than academic numbers and abstract political principles. It's going to affect everyone's daily lives to a massive extent, isn't it? Every one of us, without exception.

They've made it profoundly complicated. The myriad of invented ways of profiting many times over from every possible facet of the same fundamental deal. Lending money to a 'homeowner' in the form of a mortgage. Then immediately selling the loan on to enable them to make more money. Then buying loans in bundles, adjusting them, repackaging them, selling them at auction(?) until nobody seems to know who owns or owes what to whom in the end and it's like a game of poker that's ground to a halt because the stakes went too high and nobody dares to play on.

But they're playing with people's lives. Someone who recently bought a house because the 'expert' estate agent decided it was worth £200k and the 'expert' bank agreed that it was and that, furthermore, such was their apparent confidence in the deal that they were willing to lend £200k on the property over 25 years, is now probably in a position where their house is worth something like £180k. Which is ok for as long as they can afford to repay their initial borrowing on schedule.

But now the banks have lost confidence in house values and so they're plummeting. They're unwilling - or unable - to raise more funds to lend, so people can't borrow to buy. And they perceive their risk to be higher than before, so they want more compensation for that risk, leading to higher mortgage interest rates. Sorry if you knew all this already. (You probably did.) I'm just setting it out to get it clear in my own mind, as much as anything.

So now our recent purchaser who borrowed £200k is seeing the value of their asset shrink while the amount needing to be repaid will grow. If they built a safety margin into their sums when they took out the loan, they still might be ok. But who does? Our tendency, as humans, is to live within our means - just. If that. And to believe in 'experts' and to trust their opinion.

So it's not difficult to see how our new 'homeowner' might, with the best will in the world, end up having no choice but to fail to stick to their scheduled repayments. The normal procedure then would be for the bank to exercise its right to repossess the asset, and the defaulting borrower would then have to move out and to take any remaining debt, after the house is resold by the bank, with them.

In what we've previously accepted as being a 'normal' economical climate, that would work out ok for everyone eventually. The original borrower would downgrade to something more affordable which enabled him to keep funding his old debt from the house. Or he'd go bankrupt and another, more manageable schedule, would be arranged for him while he lived in rented accommodation. (In more recent years he might even have managed to negotiate another mortgage for himself!) The bank would get most of its money back because the house would have held its value.

But that's no longer the case at all. The original borrower might not be able to go elsewhere, having defaulted on his mortgage. Where will he go? Banks can't lend on the same terms as previously, so he's highly unlikely to be able to secure another mortgage. And the cost of renting is likely to soar sky high in response to the increased demand for properties to rent. Also, the original asset (the house) is unlikely to resell so even if it does repossess, the bank won't be recompensed.

If the above scenario happens - as expected - to hundreds of thousands (if not millions) of people in the UK, it's easy to see that the overall situation will not be viable for us as a country - hence the meetings between governments and banks to try to work out solutions.

One of the reasons why I'm so concerned is because it matters - really matters - who owns most of the housing stock and land, because that's where the power lies over our day-to-day lives, isn't it? In feudal times, the lord of the manor owned everything and everyone in his village. They lived and died and ate and worked and rested according to his will. We're supposed to have got past that kind of system now, aren't we? Individual home ownership - or at least, the promise of it after 25 years (and therein lies a whole other blog post,) is supposed to have liberated us from the tyranny of feudalism. We are now, by virtue of home ownership, supposed to be free to live our lives as we choose.

I suppose it depends on your political beliefs. The original socialists saw liberation in state ownership of property. They'd had a long spell of capitalism, by the beginning of the last century, in which landlords (and the term says it all, I think) had abused their tenants as much, if not more than, the old feudal lords did their vassals. Something had to change and it did. We ended up with a strange mixture of state-owned social housing and bank-funded owner-occupied housing, with some still renting from private landlords.

So far, so typically Britishly eclectic.

Then things got really complicated, didn't they? Social housing was either sold off to its inhabitants at knock-down values ( - a good thing, I think) or passed onto "not-for-profit" organisations called Social Landlords. Was that a good thing? I don't know. I can't really see how it's different from outright state ownership and can't really see the point of the change, except to deliberately muddy the waters. I certainly lose the plot from about that point, as regards understanding what's happening now.

So, how does the ownership of your home determine who has power over your life? In the simplest terms, your lender or your landlord sets the price you must pay to keep living there and you have to get the money from somewhere, so this determines how many hours you need to work and/or other related decisions in your life. But in more complex ways the landlord acts as a kind of corporate policeman - rightly or wrongly. In rented property - even in mortgaged, owner-occupied property, you can be evicted for breaching certain terms and conditions. A friend of mine, for example, has been kept off a property exchange list by his social landlord because of an unresolved dispute with a neighbour. And my mortgage company obliges me to keep up life insurance payments and also to keep up an insurance plan to cover the cost of rebuilding the house should it become necessary. I'm also supposed to seek its permission to take in a lodger, to sublet my house, or even to work from home.

So home ownership is a fundamental method by which populations can exert control over each other - or to rephrase that, it's a way for those who *have* to exert control over those who *have not*.

One of the things that amazes me is the way extended families volunteer - they positively clamour - to be fragmented, when each generation grows up, moves out, and puts itself in the yoke to the banks by wanting to buy another house and borrow for another 25 years. Because of this, we've got the current crazy situation, in many cases, where the old people are either languishing, lonely, in huge empty houses, or they're selling up to fund what's seen as the necessity of care homes. The next generation down - the 50-somethings - are either coming to the end of their loans and spending their newly-found spare cash on helping the younger generation to take out more borrowing(!) or they're still mired in debt. And the 20, 30 and 40-somethings are all, almost without exception, mired in debt. By living away from their parents they kid themselves that they're 'independent'. But really, they've just swapped dependency on their parents for dependency on the state, or their employer and their landlord or mortgage lender.

If the relationship between children and their parents is a very bad one, I can see the attraction of moving out of the family home and being dependent on another body. But why should that be, in most cases? It doesn't make sense. Far more logical to assume that the bonds of family love would make it unnecessary, which then makes all the other requirements of every generation 'standing on its own two feet' - fulltime paid employment, new sets of furniture, paid childcare, paid care for the elderly - unnecessary. Surely, this would lead to more individual freedom? Certainly to better systems of mutual support.

In these meetings between banks and government, I see the symbol of that political dilemma. They are deciding which of them will own our houses. State, or corporation? If the government bails out the banks with taxpayers' money, as the banks seem to be asking for, the old system might be kept in place for a while longer. But, as 'Money as Debt' aptly explains, that system is unsustainable - hence the current problems.

People obviously can't be turned out onto the streets to live homelessly en masse, so the government has to spend its reserves (does it actually still have any reserves??) trying to prevent this. It could bring in a law to take all empty houses into state ownership and then rent them out as social housing. It could even rent them back to the defaulting, dispossessed borrowers who were originally living in them.

Certainly, if it starts paying taxpayers' money hand-over-fist to the banks to try to stave off the crisis, it too will run out of funds very quickly, if it hasn't already.

But politicians won't suffer financially from this. I doubt there will be many sleepless nights in Whitehall. And I don't see any bankers offering to take cuts in salaries, though their lavish bonuses and commissions are definitely at stake and they're shedding staff as quickly as they can afford to.

An amazing 95 per cent of parents reckon they will be supporting their offspring well into adulthood, according to a report by saving specialists the Children's Mutual. Many parents are neglecting their pensions, raiding their savings and even remortgaging to give children a helping hand.
says this article.

I just don't see why people bother with the savings and the mortgages. The banks just profit from them at every turn. Why not just cut out the greedy, bamboozling middlemen and pay off one mortgage, then keep sharing the remaining funds and houseroom with the offspring, until old age brings the deserved repayment?

I can see how we need the state as a safety net for abusive family situations, but I think I'd rather it actually be a safety net. Not a spider's web.


Anonymous Anonymous said...

So what is Social Housing about? How does it benefit the public more than 'council owned' housing?
How come Uijima housing assn. went into receivership end of last year and its huge stock was transferred to another housing assn. with few questions asked? Where were the regulatory bodies?

April 21, 2008 at 1:12 PM  
Blogger Gill said...

I've no idea, but I've just found this, which is a potted history of the registered charity that took them over. You can see Ujima listed at the very bottom in this year's detail. The whole list makes it look more like a very much for profit business, doesn't it? With all those acquisitions and takeovers, etc.

Reading more about what happened to Ujima...

This news story from December 2007 talks about it having shareholders! How does a registered charity have shareholders?

According to this, it looks like it was a decision made by the banks to transfer the stock to L&Q: "The corporation has a statutory duty to put a proposal to secured creditors. The corporation's proposal is to transfer the stock to L&Q. This decision requires the agreement of all of Ujima's secured creditors before it can be implemented."

Maybe your answer is in that decision and who made it then? (Is that why you asked the question?) Shifting the previously council (public)-owned housing stock into this grey area of registered charities and not-for profit orgs means the banks can take control without the public having any say whatsoever.

Well thanks, anyway! That's taught me some more that I didn't know.

It squares exactly with the way Paul Grignon describes the relationship between governments and banks in Money as Debt, doesn't it?

And the complicated legal and financial intricacies create a shroud over what's really happening. It takes effort to try to understand it, so we tend not to bother. And the state of play is allowed to continue largely unchecked.

April 21, 2008 at 2:53 PM  
Anonymous Anonymous said...

Hello, of course others profit from our savings but if we play it right, we profit too so what's wrong with that and there's plenty of ethical options out there. If you're to avoid supporting your brood well into adulthood then a savings fund for them which will mature, the Child Trust Fund could end up in kids having up to 37K when they turn 18, enough to make them fly the nest or embark on a wide range of opportunities that they might otherwise not have. Or they might hang around until they're well into their 30s anyway!

April 22, 2008 at 9:14 AM  
Blogger Gill said...

"if we play it right, we profit too so what's wrong with that.."

LOL, where shall I start?

First and foremost I'd have to honour my libertarian principles and say: there's nothing wrong with that. If you want to do it, it's good that you're free to do so and I'm not going to condemn your decision.

But personally I'm happier without having savings in the bank. Working on the principle that having too much is as bad as not enough, it's just there for me to worry about. (Am I spending it too fast? Not fast enough? Paying the right tax? Getting the best interest rate? Is the bank going to collapse? [not an unreasonable anxiety in the present climate])

Call me paranoid if you like, but I'm happier without all those headaches.

Then we get onto the ethics of the situation - and I don't just mean the saving of polar bears etc. By paying in, you're subscribing and therefore supporting that monetary system which, although from the savings position it might all seem quite harmless and nice, actively perpetuates and relies on an ugly underside of proferring credit on people who really can't afford it, charging them huge amounts of interest and then taking their homes away. It's not a pleasant, agreeable way of sharing out our country's resources, is it? Surely, with all our combined evolved intelligence we can come up with something more sensible in the long-term?

The rest of your comment made me giggle. I take it you're not a regular reader of my blogs! But just for the sake of agrument, LOL.. why would I want to make my brood fly the nest?!

April 22, 2008 at 10:37 AM  
Blogger Allie said...

In our town we are clearly suffering from the policy of selling off the council houses from the 1980s onwards. What has happened here is that most of that housing has moved from a position where it was available to homeless or poorly housed people, into the hands of private landlords who make it available to those who can pay. Rent for a house is well over a thousand pounds a month here - and lots of ex-council stock is now rented by groups of students. They are often ripped off by letting agents and put up with poor standards of maintenance and so on. Meanwhile, families end up in temporary accommodation and have to endure frequent moves. It's a mess but some people have made a tidy packet out of that housing, which taxpayers of previous generations paid to have built...

Living in extended family units is all well and good when people choose to do it, but can be hell. I always wanted to live alone at some point and am very glad I had that experience.

April 23, 2008 at 5:54 PM  
Blogger Gill said...

That's not good Allie. I wonder what the best long-term solution would be?

Extended families, yes, they definitely shouldn't be compulsory! I sometimes wonder if I'd be doing my kids more of a favour by booting them out of the nest when they reach adulthood than I am by happily continuing to house them.

But no, I was booted out and it didn't do me any favours at all, even though home wasn't brilliant. Just knowing I was still welcome there would have made all the difference.

April 23, 2008 at 8:39 PM  

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