At the heart of the global recession were sub-prime mortgages, inaccurate valuations, and a lack of understanding of borrowers’ situations on the part of lenders.
These issues are still to be fully resolved. And they still represent a risk to mortgage lenders.
Only recently, RBS found itself paying £28m in damages because of its role. The bank suffered a serious blow to both reputation and balance sheet, by becoming embroiled in risky sub-prime mortgages. These loans were written in the very eye of the sub-prime storm – in Nevada between 2004 and 2007.
Other cases will surely follow.
According to the FSA, the world’s largest financial institutions still have plenty to reconsider, given their role in the economic crisis.
Much attention has been paid to questionable valuation policies applied to other asset classes. But retail banking was just as implicated as investment banking – and property valuations are if anything more fundamentally implicated than other assets.
Without accurate valuations, any stack of assets isn’t worth its weight in paper. The full cost of risky lending is even harder to quantify, as banks suffer from the economic downturn more than any other industry.
Valuations need to be more reliable. The integrity of the people we trust to value property is fundamental to the proper working of the mortgage market.
By contrast to small-time application fraudsters, rogue surveyors frequently cause huge damage – often many millions of pounds. A wider culture of inaccuracy – like that seen in the US before the sub-prime crisis – can be catastrophic.
Lenders who want to thrive in the post credit-crunch world must understand their exposure to third-party risk, as advised by the FSA. Knowing your surveyor is even more vital with mortgage fraud still poisoning the industry.
Mark Blackwell is managing director of xit2 Ltd
