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Risky Mortgages Need Not Apply

Risky Mortgages Need Not Apply

The bank is closed for risky mortgages. This coming from a senior official of the Bank of England, in describing how banks are to handle applications now across the UK. This plan from the Central Bank is the initial step in making an effort to prevent another possible credit crisis.

Charlie Bean, Deputy Governor of the Bank of England, thinks access to credit should be limited and that home buyers might be required to put down sizeable down payments, to even be considered for a loan. The down payment amount could be between 10 and 25 per cent.

This senior official is breaking new ground with his announcement. The Bank is simply trying to avoid seeing symptoms of another crisis by stepping in and establishing new lending rules. The loan to value ratios are the focus, because in the past high LTV's have been most susceptible to failure. Banks in the past were not only lending 100 per cent LTV, but exceeding that, even going as high as 125 per cent.

Just last month, the Financial Services Authority (FSA), banking regulator, gave the opinion that limiting mortgages was "too blunt" and could "unfairly deny" loans to worthy applicants.

Although, in a speech given this past weekend, Charlie Bean spoke of restructuring the size of mortgages as the initial step in moderating the economy.

He went into detail on the plan, saying: "Finally, there is the option of introducing direct constraints on the terms or availability of credit, for instance imposing maximum loan-to value ratios in the mortgage market.

"The best approach seems likely to involve a portfolio of instruments."

He added: "In particular, a number of developing and emerging economies have experience in applying some of these instruments, while there are also lessons to be drawn from the past experience of some advanced economies too."

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