In recent months, much has occurred in the mortgage market
and with such a lot of press/media coverage, this summary
may be helpful to people who wish to understand and 'take
stock' of the current situation.
What is happening?
The UK Mortgage Market is presently operating in a manner
that it is unlike any other within the past 30 years.
From a position of over-supply this time last year - with
intense competition among lenders - both new and
traditional - on criteria and on price - we've moved to a
state of under-supply, tightening criteria, widening lender
margins and, consequently, higher prices to the consumer.
Many lenders have even left the market - some large, some
small. Others have withdrawn from new lending and are
'sitting on their hands'. Even those with strong balance
sheets funded by deposits and savings accounts are
restricting their new lending in order not to damage their
operations or overrun their funding budgets.
The most obvious consequences of this situation are a
shortage of mortgage products, mortgage products being
withdrawn at very short notice, mortgage products being
re-priced upwards and generally more rigid lending criteria.
Why is this happening?
There are three key reasons for this happening:
Firstly, a lack of liquidity in the money markets - that is
money that would have been available for banks to lend to
each other. In the past (the distant past!) banks would
have used their deposits - money in savings accounts - to
fund mortgage and other lending. More recently, however,
mortgage lending has increasingly been funded by money
markets - borrowing from other banks - or from the sale of
'packages' of mortgages (Mortgage Backed Securities or MBS).
Unfortunately, because of the incidence of very high
mortgage arrears within MBS packages and, particularly,
those used to fund the American 'sub-prime' mortgage
market, banks have had to write off huge sums - billions of
dollars or Euro. It is estimated that 20% of lending for a
number of years in the USA has been to the 'sub prime'
market (the UK 'sub prime' market has been better
controlled and has accounted for only some 7-8% of overall
lending).
Major banks are now in a scramble to have less money market
funding for mortgages and other loans and more funding for
such lending by deposits - just like the 'old' days! And,
if a bank has surplus cash e.g. from a mortgage that is
being redeemed, it is not going to lend it to another bank
that may have financial problems hidden away in its balance
sheet. The interest rate at which banks lend to each
(LIBOR) is much higher than the Bank of England base rate
(3 month LIBOR is, at the time of writing, 5.8% compared to
the BOE rate of 5%) and, generally over the last few years,
3 month LIBOR has been running at only 0.15% to 0.25% above
the BOE rate.
In short, there is not much cash around to fund new
mortgage lending!
The second key problem is, simply, confidence. Lenders fear
that, as a result of all of the other problems in the
market, house prices will fall and that mortgage loan
performance - arrears - will worsen considerably. The
consequence of this is the tightening up of lending
criteria e.g. the disappearance of 100% mortgages - many
lenders are now insisting that potential borrowers have a
significant deposit. No lender wants to be the last one
left in the market with wide-open lending criteria.
The third issue is that of the lenders' mortgage processing
capacity. Lenders' administration systems can run into
serious problems if too much volume is taken on too quickly
and many have taken the decision to 'cool it' by adjusting
criteria or price (or both). In some cases, lenders are no
longer 'open' for new business.
Of course, the situation could become a self-fulfilling
prophecy - house prices will fall because buyers cannot
obtain mortgages to buy property. This possibility is
certainly a serious concern.
When will things 'return to normal'?
The short answer is that nobody knows! Indeed, it is quite
possible that we won't see a return to the sort of market
that we had in 2006 and 2007 for many years. Arguably, the
market then wasn't normal either - there were plenty of
aggressive new lenders with big aspirations who made the
market compete on risky terms with little or no profit
margin. Following their departure from the market, the
remaining strong lenders are rebuilding a more appropriate
approach to risk - taking lending criteria back to where we
were several years ago.
The hope in the market is that, perhaps, a year or so after
the 'credit crunch' started and when all of the banks have
gone through a whole new reporting cycle, all of the bad
news will be exposed and the write-downs and losses will be
history - albeit it, recent history. To date, we are some
nine months into the 'credit crunch' and, if the history of
previous financial crises is a guide, we are more than
halfway through the current squeeze.
If the confidence issue can be handled, we may see lenders
becoming competitive again and with a return to larger
lending appetites and willingness to grow.
Essentially, everything points to a slow and steady
recovery; there will still be tough times ahead with the
numbers of arrears/repossessions ticking upwards.
The Bank of England has made £50 billion available to
banks via a 'Special Liquidity Scheme' and this is a
deliberate move to free-up liquidity and confidence in the
market; this has to be considered positive news.
Are there any reasons to be cheerful?
There are some positives in the current situation -
fundamentally - the fact that the UK is not USA!
In the UK, employment is at record high levels (unlike the
early 1990's) providing a high demand for housing. At the
same time, there are not enough new homes being built in
the UK. The economic law of supply and demand means that
the housing market is strongly underpinned and is unlikely
to suffer a 'crash'.
Overall new lending is clearly down but demand remains
strong, in particular for 'buy to let (the rental market is
boosted at such times) and for re-mortgaging (rate
switching, debt consolidation and capital-raising). The
lending for house purchases is quiet and will remain so
until confidence returns to the market.
In addition, interest rates are on the decline and some
economists have predicted the possibility of BOE rate
becoming as low as 3.5% to 4.0% next year.
Whether falls in BOE rate will be followed by falls in
mortgage rates is far from certain - with sufficient cuts,
the cost of borrowing should become cheaper and, perhaps,
encourage more people back into the mortgage and housing
market.
Mortgage brokers remain the most favoured route for
consumers to obtain mortgages from lenders and the
proportion of mortgages arranged by brokers has increased
over several years as 'shopping around' has become more
common. Customers need advice more than ever and
independent brokers have a key role to play in this regard
- in order to obtain the best possible deals for their
clients and to protect their client-banks from other
brokers or lenders hunting for good quality business.
Your home may be repossessed if you do not keep up
repayments on your mortgage
----------------------------------------------------
Author of a number of financial articles published globally.
http://www.afpmortgages.co.uk
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