10 years ago the US sub-prime mortgage market hit the rocks and triggered a financial tsunami around the world. Many of us, I’m sure, will never forget the sight of panicked queues outside Northern Rock banks as the waves of destruction reached UK shores and began to lap at the doors of our High Street banks.
There were many reasons for the financial crisis – it was, in fact, a perfect storm.
A Perfect Storm
So many events collided to create the havoc and there’s a huge resource of articles online by financial analysts which explain how the US mortgage market operated back in 2007 and how it all so quickly and devastatingly fell apart. It’s a cautionary tale for the 21st century and I’d urge everyone working in the financial industry to take a little time this summer to read what the analysts and financial journalists reported at the time and what they are saying a decade on. If we have any role in the financial sector, it is our responsibility to learn the lessons from the past and do our bit to help create a safer financial world today.
Much of the problem which precipitated the crisis was due to banks re-packaging mortgages into mortgage-backed securities which were then re-packaged again into high risk and low risk bundles which were so complex that nobody really understood what they were buying or selling. These mortgage products were also bought by individual investors, pension funds and hedge funds, resulting in the risk being spread throughout the economy.
What was the Cause?
All this is true but as I see it from where I sit on the Castlight Financial team, at the centre of the storm was a very simple phenomenon. The tools available to understand the customers’ affordability and financial capability were not available to the banks and lenders and therefore income self-certification was an industry standard. So much human misery then ensued.
As many as 10 million Americans were reported to have lost their homes to foreclosures during the resulting housing crisis and a 2013 report by PricewaterhouseCoopers cited the obliteration of 7 million jobs across the developed world in the five years following the events of 2007. And of course, here in the UK, we had newspaper headlines in March 2008 delivering the news that £51 billion had been wiped off the value of the country’s top companies.
It doesn’t take much imagination to appreciate how these figures impacted on real people, real families, without homes, without jobs.
How do we Stop it Happening Again?
So what have we learnt since those “greed is good” days? Happily, we are in a much safer place for both borrowers and lenders. The April 2014 Mortgage Market Review has done much to regulate the market and stress test borrowers’ ability to repay loans.
But at Castlight we passionately believe that we have the disaster-proof solution to mortgage safety. If borrowers and lenders in the sub-prime era had worked together as a team, using our Affordability Passport, it would have been crystal clear to both parties whether or not a mortgage was affordable and sensible, however alluringly it might have been packaged. It’s sobering to think how many millions of lives across the world might have turned out so very differently.