After the Credit Crunch now The FSA Threatens the Economic Recovery
Posted on 12 August 2010 by
Gross mortgage lending has fallen 61% from a peak of £362.6bn in 2007 to £142.6bn in 2009 and the 2010 figure is likely to be similar. Net lending has collapsed from £108bn in 2007 to £11.5bn last year, but net lending last year by banks was £36bn, a fall of about 50% from its peak, whilst there was negative net lending from the specialist lenders and, to a lesser extent, the building societies, of about £25bn.
Current indications are that net lending this year from the banks will be similar to last year but specialist lenders are likely to be in a negative net lending situation for several more years as some mortgages are redeemed but there is very little new lending as most lenders in this category have either ceased to trade or stopped lending. However, the situation is slowly improving as some lenders have re-entered the market in a modest way and we have seen a few totally new entrants, some of whom are being financed by Private Equity because the Residential Mortgage Backed Securities (RMBS) market shows no sign of re-opening for this type of lender. Building Societies have also increased their lending this year and so overall a small increase in net lending compared to last year looks probable.
The current government continue to play the same populist game of banker bashing initiated by the previous government and continues to implore the banks to lend more, without proposing any extension of the timeframe to repay funds borrowed from the Bank of England. The Bank may be able to print money but the quicker our banks have to repay the money borrowed from the Bank of England the less they can lend. It really isn’t rocket science!
It would obviously be helpful to the mortgage market if the banks increased their lending, but as the above figures show the bigger problem is the virtual disappearance from the market of specialist lenders, and this is due to their previous sources of funding disappearing.
Instead of playing to the gallery, a more productive role for the Government if it genuinely wants mortgage funding to increase would be to find a way of facilitating a serious and sustained re-opening of the RMBS market. Although there have been a few RMBS issues over the last year the market appetite for these bonds is very limited. A good start might be to encourage the covered bond market, although this route would only be open to a small number of top rated lenders.
As we enter the fourth year of the credit crunch the chickens look like increasing coming home to roost for many consumers, courtesy of the FSA, which now plans to deprive a significant number of people of the ability to buy their own home. If its proposals on affordability in last month’s Consultation Document: “C.P.10/16: Mortgage Market Review: Responsible Lending” are adopted without significant changes the lack of funding for mortgages will cease to be a problem. This is because as currently proposed the FSA’s new affordability rules are so draconian that they will prevent lenders from offering any mortgage at all to a large number of perfectly credit-worthy people they would be happy to lend to, even with their current very restrictive lending criteria.
Furthermore, it will significantly reduce the maximum mortgage amount lenders are allowed to offer many other borrowers, especially those with volatile incomes. This will undoubtedly result in a sizable reduction in activity in the housing market as lenders are forced by the FSA to either decline many more mortgage applications than they do now or tell a sizable number of borrowers who have comfortably met their mortgage and other commitments for many years that they are not even allowed under the new FSA rules to offer the same size mortgage they are currently servicing, let alone more to facilitate a move to a larger home as their family grows.
Because the housing market is such an important driver to the economy the resulting reduced activity will have an adverse impact on the economy generally, resulting in a toxic mixture of reduced tax receipts for the Government and increased benefits payments. It will therefore be much more difficult for George Osborne to meet his target date for re-balancing the structural deficit. It is a brave Government which allows its financial services regular to threaten the economic recovery in this way!
Apart from the relative lack of competition compared to the situation borrowers enjoyed before the credit crunch, a major impact for borrowers has been the much tighter lending criteria and massive differential between rates charged for low and high Loan to Value (LTV) mortgages. Although, because of its timing, this latter point is generally perceived as being a result of the credit crunch this is only part of the story. Long after the credit crunch becomes a distant memory this divide between high and low LTV borrowers will continue unless there is a change of heart by the regulators, particularly the Basle Committee.
As a result of Basle 2 lenders now have to set aside exponentially increasing amounts of capital to support higher LTV lending. The cost of this capital is exceptionally high in the current very steep yield curve environment as it has to be invested in risk free assets currently yielding 1% or less. The burden of holding this extra capital will reduce when the yield curve narrows, which would allow for a contraction in the spread between the rates offered for high and low mortgages, but there is little likelihood of this happening to any significant extent in the near future. More competition in the market would help but with the FSA often taking a year, and sometimes more, to approve new lenders even those new lenders which have lined up funding will not be allowed to provide more competition quickly.
For loans in excess of 75% LTV the marginal cost of the top slice of borrowing as a result of crossing a 5% LTV threshold is now so high, well into double figures in many cases, that it would often be cheaper to obtain the top 5% of borrowing as an unsecured loan, although the unsecured loan would have to be repaid over a shorter period. Such unsecured loans would only be available to a borrower with a very good credit rating, but the same applies to mortgages at the higher LTVs. It is a nonsense that this should be true as unsecured lending is obviously more risky than secured lending, but what it tells us is that the market is not working efficiently. Whilst partly due to the credit crunch induced lack of competition, especially at higher LTVs, this is also a serious indictment of the Basle 2 rules because it is the impact of Basle 2 that is the primary cause of this departure from common sense.
Without parental help on schemes such as Lloyds TSB’s Lend a Hand mortgage, or going down the shared equity route, first time buyers (FTB) need a minimum deposit of 10% to have a chance of getting a mortgage. Even then even those with a perfect credit history will often be rejected because the lender considers their credit score to be too low, possibly simply because as they have been saving for a deposit and consequently haven’t had any borrowing they can’t prove they can handle credit!
Proving you can save regularly doesn’t impress most of the big computer driven lenders, whereas proving you can make the minimum payment on time each month on a few credit cards does! Fortunately some of the smaller lenders use a human underwriter with common sense instead of relying solely on a credit score and this is just one example of where a good independent mortgage broker can help FTBs by choosing a lender which will actually lend to them rather than an apparent “best buy” for which they will probably be rejected.
Just before the credit crunch In June 2007 the best value 5 year fix for at 95% LTV was 5.79% with a £199 fee and no higher lending charge, offered by Portman Building Society, and the best value lifetime tracker at 90% LTV was Bank Rate + 0.09% with a £749 arrangement fee from Chesham B S. At that time Bank Rate was 5.5%. Today, with Bank Rate at 0.5%, 95% mortgages are not generally available but the cheapest 5 year fix at 90% LTV is 0.1% more expensive at 5.89% with a £499 fee from Co-op / Britannia and the cheapest lifetime tracker at 90% LTV is Bank Rate + 3.99% with a £599 fee from HSBC.
Thus, even when a FTB has managed to save a 10% deposit and get approved for a 90% LTV mortgage they will pay more for a 5 year fix today than pre credit crunch. Furthermore they will not have the option of an interest only mortgage, with or without a robust repayment plan, as no lender is now offering this option at 90% LTV. One benefit FTBs do have as a result of the credit crunch, provided they can save the deposit and get a mortgage, will be that property prices are lower, but this is of no value if they can’t get a mortgage!
For the foreseeable future we will have a FTB market of the haves and the have nots. The minority who have inherited some money or are able to save the large deposit required while also paying rent will be able to buy their own home. The rest will have little option but to either live with their parents far longer or rent without any realistic likelihood of being able to buy their own home for a very long time, unless they can get help from parents, or perhaps grandparents. It is much more likely that parents who own their own home will be in a position to help out in this way and so a lasting legacy of the credit crunch will be to perpetuate the divide between families who are homeowners and those who are not.
david barker says:
For example, would you give this introduction/headline any credibility:
Renowned Fishmonger, who was recently voted "Fishmonger of the Year", advises consumers that they should buy more fish. And pay more for fish.
Drew Wotherspoon says:
How interesting that you believe Ray's position means that he has no credibility or right to make these comments. Are you therefore suggesting that any comment from any company should be discarded by consumers? It seems that such a proposal would destroy not only the public relations sector, but also the media.
Does the media not function on reliable and informed comment from experts to populate their stories? Otherwise, our newspapers would just be one long editorial comment. You would then be reading someone's opinion on any range of subjects and what are their qualifications for that other than a degree in journalism?
Now, of course, should you be the author of a blog without any accreditation then of course you open yourself up to accusations of bias and self-interest. The fact that Ray is well-regarded and quoted hugely by the media would seem to suggest he knows what he is talking about. Only a well-rounded and consistently considered approach to these comments ensures that you remain a respected voice and commentator in any arena. If you can find a more frequently used expert over the last decade when talking about mortgages do let me know.
I have no doubt that if you ever had the chance to ask your question, or indeed make the statement you do in the first paragraph to any journalist, they would tell you exactly how credible he is.
What will be your criteria for that? Can people disagree with you? And criticise your positions?
Drew Wotherspoon says:
You absolutely can, we very much (genuinely) welcome debate. It's the swearing we don;t particularly like.
So better to lend silly money again and re-inflate the bubble rather than allow prices to return to sensible levels, meaning mortgages will be affordable and accessible with current criteria in place. Or am I missing something..? Why are we so afraid of lower housing costs?
I think the issue here is that Rays comments tend not to be "well-rounded" merely reporting the story to suit the continued vested interested of those exposed to the housing industry. Does it really make sense to borrow off parents to buy a house? If you cannot afford a house then encouraging someone to leverage oneself excessively is surely not good advice, unless the purpose is to maintain a false impression of the real value of real estate (and the mortgages that underwrite it!)
I hope you are aware that we had a credit bubble, that pushed up assets prices. These are still near peak levels, and are unsustainable. You must know that.
Yes, the government "implores the banks to lend more", but for businesses, not mortgages, and I think your article is disingenuous by implying otherwise.
To improve "affordability", first we need much lower prices, and only then we can have easier credit.
Our economy was not exactly driven by the "housing market", but by the cheap credit that it brought to consumers, who are now over-indebted. This "route" had a dead end, and we've reached it.
I'm sorry, but I can't keep reading your "article". It is too full of mistakes.
Drew Wotherspoon says:
Of course, you would expect us to say this, but we try not to make comments that are purely about driving business through to John Charcol. There are enough inquiries made to us every day from people with a genuine need for mortgage advice that we do not need to do that. Rather, we try to produce sensible comment that helps and informs.
That said, I take your point, that perception is of a man who merely does make comments to drive business, but that is far removed from the actual reality. But, again, I appreciate that my word for that is a little difficult to accept.
Aside from that, it is interesting to debate the sense, or otherwise, of borrowing from one's parents to purchase a house. History shows that many parents have given their children a start in life, it is just that today we see more generosity than we would arguably have in years gone by.
Make no mistake, the country is obsessed by houses and house prices, and many, many people can claim some responsibility in driving that. We have been a mortgage broker for 35 years and have tried as hard as possible to make sure every single person who comes through our doors gets the very best advice for them. Believe it or not, we turn away many inquiries that we may well be able to place somewhere because they are just not sensible or good advice.
Drew Wotherspoon says:
I am not sure I fully agree with some of your comments, and it seems that you believe there are a plethora of mistakes in the blog. All I can say is that Ray would be genuinely happy to debate your points and to further engage with you if you can finish the blog and let us know the totality of the "mistakes".
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