Money for Nothing

3) Self Certification Mortgages these arose out of the Catch 22 for the self employed from the issue of tax submissions (that were from the point of human cognitive response bound with ‘loss aversion’) of the individual/business and required accounts to be submitted to the tax office. This was often compiled by the individual and then passed onto a qualified tax accountant (full chartership only required for LTD companies) to calculate with the information supplied finally showing income after ‘expenses’. The obvious goal for both parties was for to be legally as low as possible, so for the obvious reasons of not paying any more tax than is legally required. Whereas to get a mortgage the same S/E person had to show 3 years of previous accounts showing as much income as possible, thus the paradox;

“to declare full income, pay more tax and get the required mortgage amount or not to declare full income and save on tax, but not get the required mortgage amount due to not enough income, what to do?

At the time (and still I suspect) many transactions were not declared and it has been said that the Tax office assumed anyone handling cash will not declare on average 20% of their income.

A further paradox from a political perspective was that a new aspirational group of people were encouraged to be entrepreneurial and self sufficient by governments (post 1979-present) who promoted a neoliberal policy of free market independence from the confines of PAYE employer employment. So (note; I can’t find an exact date at present so to be updated) the Self-Cert mortgage was introduced, where the applicant would submit their income with no proof, just their word, and not surprisingly these soon became known as liar loans.

Liar Loans

By 2005 this market was worth around £11 billion and grew around 30% from 2000-2004, which was around 6% of the mortgage market. This was open to the abuse of the S/E certifying a far higher income to secure to higher borrowings that further inflated the housing market and the coffers of the financialised debt industry, so a seemingly win, win, until the 2008 crash when the unravelling of the debt market caused the barometer of free market capitalism to fall of the the wall in an earth shattering crash. They were subsequently banned in 2009 by the Financial Conduct Authority (FCA)

Note; they were not the cause of the crash rather just part of the overall self regulated market that neoliberal policy proclaimed as being the answer for capital growth, in particular the economist Milton Friedman, who initially got high return results from his deregulation of the US and subsequently UK stock markets and thus a bonfire of regulation for more gain on a speculative economy looking for more ways to financialise debt market.

Why were they ultimately banned ?
One, because of defaults due to the recession post 2008, two, the abuse and revealed packaging of debt to mitigate and spread the risk, using low risk debt to cover and average out the Self-Cert risk, and thus regulated lending responsibility returned to the lending sector with stress testing to make sure the mortgagee could withstand a 3% rise in the mortgage rate, which now in 2022 has now been reduced, so as to help the working and middle class applicants whose incomes have stagnated compared to house inflation, to be accepted for a mortgage.

Now in late 2022 we are entering a recession were the prediction is that house prices will fall by 10-15% due to high interest rates reducing the yields for Buy to Let landlords who will try and pass on the increases, but the fear of loss of income and falling values will mean many will try to sell. Add to this repossessions due to the failure to keep up with the higher mortgage repayments, (which in 1992 ERM crisis took a couple of years to work through the market) and those wishing to buy waiting till the market bottoms out means that until confidence returns to the market via near future confidence and government intervention such as stamp duty holidays, easier overseas and 2nd home purchase, and other help for easier release of equity in parental homes to fund children’s deposits, the market will be hard to guess unless real intervention by government into the economy via FDR New Deal style spending for real productive ‘additive’ growth or another 10 years of near stagnation via subtractive Austerity.

All to keep the asset owning voter market inflated for election purposes, rather than letting it fall as, ironically, free market forces would do, if left to it, and thus the conclusion is; that there is ‘no such thing as a free market’, only a manipulated market for those who have the power and influence to do so and reap the benefits, which historically equates to r>g.

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