Mortgage Lending Solutions
The UK mortgage market (May 2008)
The UK mortgage market (May 2008)
In recent months, much has happened in the mortgage market and with such a lot of press / media coverage, this production is useful for people who want to understand and "take stock" of the current situation.
What happens?
The UK mortgage market is currently operating in a way that is unlike any other in the last 30 years.
From a position of oversupply this time last year – with intense competition among lenders – both new and traditional – Criteria and on price – we have moved to a state of under-supply, tightening criteria expansion lender margins and thus higher prices for consumers.
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 Others have withdrawn from new lending and are 'sitting on their hands.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 balances 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The most obvious consequences of this situation is a shortage of mortgage products, mortgage products withdrawn at very short notice, mortgage products are priced upwards and generally more rigid lending criteria.
Why is this happening?
There are three important reasons why this happens:
Firstly, a lack of liquidity in money markets – that is money that would has 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 loans and other loans. Recently, however, Mortgages are increasingly financed by money markets – loans from other banks – or from the sale of "packages" of mortgage debt (Mortgage bonds or MBS).
Unfortunately, because of the presence of very high mortgage arrears within MBS packages and especially those used to finance the U.S. 'sub-prime "mortgage market, banks have had to write off huge sums – billions of U.S. dollars or Euro. It is estimated that 20% of lending to a number of years in the U.S. has been "sub prime" market (the UK 'sub prime' market has been better controlled and has represented only about 7-8% of total lending).
Major banks are now in a struggle to get 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 eg from a mortgage that will be redeemed, it will not lend it to another bank that may have financial problems hidden away in its balance sheet. The interest rate which banks lend 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 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, not much cash around to fund new mortgages!
The second key problem is, simply, confidence. Lenders fear that because of all 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 of lending criteria, such as disappearing 100% mortgages – many lenders are now insisting that potential borrowers have a substantial deposit. None lender wants to be the last person left on the market with wide-open lending criteria.
The third problem is the lenders' mortgage processing capacity. Lenders' administration systems can run into serious problems if too much volume is taken quickly, and many has decided to 'cool it' by adjusting criteria or price (or both). In some cases, lenders no longer "open" for new business.
Of course the situation can become a self-fulfilling prophecy – house prices will fall because buyers can not get mortgages to buy property. This possibility is certainly a serious concern.
When will things "normalize"?
The short answer is that nobody knows! It is very possible that we will not see a return to the kind of market that we had in 2006 and 2007 in many years. Presumably, the market then was not normal either – there were lots of aggressive new lenders with big aspirations who made the market compete on risky terms with little or no profit. After their departure from the market and the remaining strong lenders to rebuild a more appropriate approach to risk – taking lending criteria back to where we were several years ago.
It hopes the market is that maybe a year or so after "credit crunch" began, and when all banks have been through a whole new reporting cycle, all the bad news will be exposed and downs and losses will be history – though the history of recent date. To date, we are some nine months 'credit crisis', and whose history of previous financial crises is a guide, We are more than halfway through the current squeeze.
If the trust problem 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, and there will still be tough times ahead by the number of arrears / repossessions ticking upwards.
The Bank of England has made 50 billion available for banks via a 'Special Liquidity Scheme "and this is a deliberate move to free-up cash and confidence into the market; This be considered positive news.
Is there any reason to be cheerful?
There are some positives in the current situation – fundamentally – the fact that the UK is not USA!
In the United Kingdom Employment is at record levels (in contrast to the early 1990's) gives a high demand for housing. At the same time there are not enough new homes built in Britain. The economic law of supply and demand means that the housing market is strongly supported and it is unlikely to suffer a "crash".
Overall new lending is clearly down but demand remains strong, especially for 'buy to let (rental market is boosted at times) and re-mortgaging (Rate switching, Debt Consolidation and recapitalization). The housing loan is still and will remain so until confidence returns to the market.
In addition, interest is declining, 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 a decline in mortgage rates is far from certain – with sufficient cuts, the cost of borrowing becomes cheaper and maybe get more people back into the mortgage and housing markets.
Mortgage brokers remain the most favored route for consumers to obtain mortgages from lenders and the proportion of mortgages arranged by brokers has grown over several years as 'shopping around' has become more common. Customers need advice more than ever, independent brokers have a key role to play in this context – in order to achieve the best possible deals to their clients and to protect their client-banks from other brokers or lenders hunting for good quality business.
Nigel Osgood on 01628 636360 ext. 257 nigel@afpmortgages.co.uk
www.afpmortgages.co.uk – Winners – 'TOP UK Mortgage IFA 2007' – The annual awards sponsored by Legal & General and mortgage bonds Solutions Magazine
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About the Author
Author of a number of financial articles published globally.
www.afpmortgages.co.uk