Alan Brener - Housing and Financial Stability: Mortgage Lending and Macroprudential Policy in the UK and US (Routledge Research in Finance and Banking Law)

This book brings together politics, law, financial services regulation, economics and housing policy in the analysis of mortgage lending and macroprudential policy in the UK and US.

The book addresses the relationship between housing policy, credit and financial instability in light of the recent global financial crisis, and proposes both short and long-term solutions. Although it is not known where the next crisis will come from, history suggests that it will have credit and property at its source. Thus, it is important that the UK and other countries look more broadly at what should be done in terms of policies, institutions and tools to make the housing market and mortgage lenders more resilient against a future crisis. This book sets out a number of workable proposals. Central to this work are questions relating to the quantitative macroprudential measures, such as loan-to-value (LTV) and debt-to-income (DTI) restrictions, and whether these can be used to any significant extent in western democracies and, if employed, whether they are likely to be effective. In particular, the book questions the political legitimacy of their use and the potential consequences for the institutions, such as central banks, promulgating such policies. Preserving financial stability in very uncertain market conditions is of key importance to central bankers and other regulators, and macroprudential policy is a rapidly growing subject for both legal and economics study.

This book will therefore be of interest to financial professionals, policy-makers and academics.

Alan Brener is Deputy Director of the Centre for Ethics and Law at University College London and a Teaching Fellow at University College Londons Law Faculty. He has a PhD from Queen Mary University of London and LLM from UCL. He has worked for many years in financial services and its regulation.

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Housing and Financial Stability

Mortgage Lending and Macroprudential Policy in the UK and US

Alan Brener

For more information about this series, please visit: www.routledge.com/Routledge-Research-in-Finance-and-Banking-Law/book-series/FINANCIALLAW

First published 2020

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Routledge is an imprint of the Taylor & Francis Group, an informa business

2020 Alan Brener

The right of Alan Brener to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

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ISBN: 978-0-367-35553-1 (hbk)

ISBN: 978-0-429-34151-9 (ebk)

Typeset in Galliard

by codeMantra

For Fiona and David and my father, Leon

This book draws on both my own experience and research over several decades in financial regulation and policy formation and implementation. Additionally, it develops the thoughts and views of a number of senior officials in government, regulation, politics and the financial services industry. I am grateful for their cooperation and the frankness with which they expressed their opinions which were all provided on the understanding that they were speaking in a personal capacity and that what was said would not be attributed.

I am also indebted to the intellectual support of my two PhD supervisors: Professor Rosa Lastra, Sir John Lubbock Chair in Banking Law, and Dr Costanza Russo both at Queen Mary University of London, whose knowledge, judgement and guidance have been invaluable. I am also grateful for the advice and support of Professor Patricia McCoy, Liberty Mutual Insurance Professor of Law at Boston College.

Finally, but not least, writing this book would not have been possible without the support and good humour of my wife, Fiona, and son, David, and my father, Leon, who have made themselves experts on the books contents and, as always, provided superb guidance over the years. Nevertheless, all the faults and errors remain mine a perfect rule for domestic bliss.

The financial crisis precipitated by the events of 2007/8 could be described as a world undone by mortgages. The UK, more recently, has been described as a

nation bewitched by property

It can establish both memory and hope. Over the last hundred years, this has become central to a socio-political understanding of how a popular demand for owning a home reflects a desire for security and optimism for the future.

Richard Brome, The English moor (published 1640, University of Missouri Press, Columbia, 1984), Rashley, Act 1, Scene 1.

Quoted by Tristram Hunt MP during the debate on the Housing and Planning Bill, 2 November 2015, Hansard, column 777.

Tristram Hunt, How the English became obsessed with property (New Statesman, 2 February 2004).

Ioannis Kapodistrias, Letter to A. M. le Chevalier Eynard, February 1830, Correspondence de Comte Capodistrias, (1839), 3, Geneva, 472473, Bibliothque Universit De Genve.

Shelley Mallett, Understanding home: a critical review of the literature, (2004) The Sociological Review, Vol. 52, No. 1, 6389, 66.

Residential housing mortgages have provided the fuel to satisfy this desire. This has been mirrored by the involvement of banks in housing finance in, for example, the US since the 1920s and in the UK from the 1970s. This has changed the composition of bank lending and balance sheets. The rapid growth in this lending was at the heart of the recent financial crisis in the UK and in a number of other countries. The consequential financial instability threatened not just the global financial system but has spread to the real economy and is likely to have had a significant influence on the political system.

As a consequence, international cooperation and national initiatives have developed macroprudential policymaking to improve financial stability. These steps have both measured and highlighted risks to financial stability and implemented actions to help reduce these risks. The latter policies broadly fall into two groups of instruments or tools: those that seek to reduce bank lending by increasing the cost to banks of rapidly increasing credit, and those that placed quantitative restrictions on such lending particularly for house purchases.