After the Credit Crunch now The FSA Threatens the Economic Recovery

Posted on 12 August 2010 by Ray Boulger

27 comment(s)


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.

Categories: Property market, Bank of England, Mortgages, Personal finance, Regulation, House and home

Comments

Laura,

I agree in part with your last paragraph, where you say “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." However, my view is that the housing market had a rather more significant role in this than you imply. Apart from 0% credit card balance transfers (which if the APR had to be calculated sensibly would have been quoted at 2.5% - 3% after allowing for the fee) using one’s home as security to borrow more money was, for most people, the way to borrow at the cheapest rate.

Not only that but too many people simply compare different credit options only by the monthly payment and because a mortgage would normally be paid back over a much longer term than an unsecured loan increasing one’s mortgage was also usually much cheaper in monthly payments than borrowing the same amount in other ways.

It suited the Government not to thwart this extra borrowing because when that money was spent it generated extra taxes, boosted the UK’s GDP and generally helped the feel good factor, which in itself increased the likelihood of the Government being re-elected.

The only reason all the extra borrowing was possible was because the banks, and to a lesser extent the building societies, were flush with money which they were able to borrow cheaply in the money markets. For example at the end of 2007 about 25%, £300bn, of UK mortgage lending was funded in the wholesale markets, mainly by residential mortgage backed securities (RMBS).

Those wholesale markets dried up virtually overnight in 2007, which was what caused Northern Rock to fail, because it had grown very rapidly and financed most of that growth by issuing RMBS. As these bonds and other wholesale borrowings matured Northern Rock was no longer able to roll over the short term borrowing or refinance the long term debt.

You claim that “the government "implores the banks to lend more", but for businesses, not mortgages,” and say you think my article is disingenuous by implying otherwise. I suggest you study the legal agreements between the Government and both RBS and Lloyds Banking Group, which those banks were required to enter into as a condition of the Government bail out. You will find that there is not only a requirement for both banks to lend a minimum amount on residential mortgages but also a condition regarding higher LTV lending.

Finally you say that “To improve "affordability", first we need much lower prices, and only then we can have easier credit.” Obviously lower prices would improve affordability but it is much more complex than that. The two other key factors which influence affordability are interest rates and the mortgage term. Whatever amount someone was comfortable borrowing on a 25 year repayment mortgage when mortgage rates were at 7.5%, for the same monthly payment and term at a mortgage rate of 4.5% they could afford a mortgage 33% higher.

In my view this is the most important reason why house prices increased much faster than earnings. The other major reason is the greater and easier availability of mortgage credit. The latter factor is now being unwound as a result of the credit crunch, and this process will take many years, whereas I expect the former to be relevant for the foreseeable future.

Until 1990 the UK had very volatile inflation and interest rates and one had to budget to be able to afford a mortgage at a rate of up to 16%. Clearly at the moment one should budget for rates well above today’s level and there can be some disagreement as to what level one should budget for but it would certainly be a rate well below 16% and most people would accept it should be a rate in single figures.

As people retire later it would be perfectly reasonable for to take out a mortgage over a longer term, again improving affordability, assuming the same age at the time of purchase. In practice, partly because of the difficulty of saving up the required deposit, the average age of first time buyers (FTBs) is increasing and so the effect or retiring later is being counter balanced by the average FTB being older. What is happening is that we are increasingly becoming a society where the ability to but one’s first property depends on whether parents (or perhaps grandparents) are able and willing to help with the deposit.

Ultimately house prices are dictated by supply and demand and parents are entitled to use their money as they wish, which includes giving or lending it to their children on whatever terms they wish. This clearly puts those without parents able to help at a huge disadvantage if they want to buy a property, but life is not always fair.

However, as you think house prices are still much too high I assume you would consider it madness to buy at current levels and therefore would see renting as a much more sensible option. Presumably only if prices fall to the level you think reasonable would you consider buying and if prices do fall that far I hope you will be able to get a mortgage. We would be very happy to advise you on your options if and when that time comes.

However, although some people on this thread are wishing for a rapid and sharp fall in house prices, if such a price adjustment happened too quickly we would see many more banks going bust, or being bailed out, because so much of their lending is secured on property. Getting a mortgage would then be even more difficult than it is today. To avoid this any downward movement in house prices needs to be more gradual, or alternatively incomes could rise with house prices remaining fairly static. If incomes rise very quickly it would be because inflation had shot up, which would mean much higher mortgage rates and falling house prices.

This may appear to be an ideal scenario for those waiting to buy but the result could easily be that houses were even less affordable because the lower prices might easily be offset by far higher monthly payments being required because of much higher mortgage rates.

Ray Boulger03/09/2010 20:09

FSA threatens economy? Nah, it's massive debt hanging over people and the country doing that.

Has the FSA actually stopped self-cert mortgages yet?

Emily24/08/2010 11:44

The biggest barrier to first time buyers is overvalued house prices not high deposits. If lenders were to require low deposits it would be suicide for them as house prices fall to normal levels. Tougher lending criteria is the best thing to come out of the credit crunch and should be praised rather than slated.

Gavin23/08/2010 21:14

RG's comment about Ray being a fishmonger trying to persuade people to buy more fish and pay more for fish is a classic.

Although it portrays the apparent vested interest Ray has in talking the housing market up - as a business plan it is completely wrong. That fishmonger would go bust, pricing himself out of the market.

Cassandra23/08/2010 18:21

Drew,
You are welcome.

What Ray needs to understand is that successful businesses thrive on VOLUME. If Tesco or Asda priced their goods so that only a few people could afford them do you think they would make as much profit?

If mortgage broker Charcol had taken a view that VOLUME is good for business, perhaps they might not have gone into administration earlier this year?

Cassandra23/08/2010 18:16

Look, the laws of economics on this are simple: Home prices cannot ascend, over long periods of time, faster than real wages. That is, you cannot afford more house unless you make and bring home more money, in terms of dollars.

Further, with interest rates now at extreme low levels, the "payment buyer" (that's nearly everyone) is buying at a secular high in affordability as measured by payment.

The $200,000 loan at 4.5% interest for 30 years carries a P&I (principal and interest) payment of $1,009.58. The same loan at 6% carries a P&I of $1,193.14.

Put a different way that same $200,000 loan is only a $169,232 loan when - not if - rates go from 4.5% to 6%.

You don't buy things on long-term amortization schedules unless you intend to run the clock on the schedule when rates are very low. You buy them when rates are high, because then affordability of those payments is at its worst and is likely to get better.

Wayne23/08/2010 17:45

It's all going to end very badly.

Jeremiah23/08/2010 17:37

Cassandra,

Thank you for your charming comments, thoroughly well informed as they are. I am sure many people would be impressed that you believe Ray has single handedly killing the housing market...

Drew Wotherspoon23/08/2010 17:01

PG, thank you. We are fully aware that there are a band of merry people on a certain website, who i will not give the satisfaction of providing a link to, that seem to think calling Ray every name under the sun is acceptable. Dare I say (and my opinion only) we have one above...

Drew Wotherspoon23/08/2010 16:58

Gilly, I will let Ray respond to your points

Drew Wotherspoon23/08/2010 16:54

Ray has got it all wrong. High house prices are reducing activity. If he had a brain he would want house prices to fall because then more peope could afford them and activity would rocket. With all the air time this airhead gets he is single handedly killing housing market activity. A slow long drawn house price correction is not good for mortgage brokers or estate agents. If we had a quick correction down in house prices then activity would pick up.

Cassandra23/08/2010 16:51

You should be aware that there is a concerted effort from those on a certain website to rubbish all of Mr Boulger's comments here. The website in question full of ex BTL and sold-to-renters who desperately want prices to crash so they can buy back in. No problem with these people commenting, but their comments need to be put into perspective.

PG23/08/2010 16:43

from may 2007...this is why no one should listen to someone with a vested interest. note the bit about relative prudence of UK mortgage lenders...oh dear...

Certainly if the US economy goes into reverse and there are job losses, world economic growth and that of the UK could be affected," agreed Ray Boulger of mortgage broker Charcol. "This could, ultimately, have a dampening effect on the UK housing market."

But Mr Boulger also pointed out the differences between the market conditions of the US and UK, especially the short supply of housing and the relative prudence of UK mortgage lenders, as reasons why he believes the market will escape a crash.

gilly23/08/2010 16:41

Laura,

I did not say we wouldn't answer your points, rather if you wanted to present all your questions and issues which you clearly made reference to. We will answer the four points you make above soon

Drew Wotherspoon23/08/2010 16:33

Daltski,

People will want to own houses no matter what. We have been doing this for an awful long time and have done it through good times and bad times. I don't suspect i will be able to say anything to convince you of our consumer friendly stance, however, for the record, we currently run at an average of 62% LTV - so we are trying to do our bit for sensible lending.

Drew Wotherspoon23/08/2010 16:31

I'm sorry but that is a very lame excuse. I have listed the main points already. Why don't you try to reply to these, if you can, and we go from there?

"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."

Laura23/08/2010 16:11

Parents lending a helping hand to put a 10% deposit down on an 80k flat (they used to exist, honest!) is a little different to passing on a 40% deposit (on most likely a property in excess of 150k) as Ray suggested this morning, generosity or no generosity. Fact is prices are too high versus historical norms and any parents stupid enough to provide this kind of assistance to their children will be likely be handing their house keys back to the bank at the same time as the kids! Who does that benefit?

And as far as your turning away of business, if your so-called experts, who have continued to advocate house ownership despite the obvious flaws in an over-leveraged system, were true to their customers, I doubt you'd be at your PC now to carry on this conversation!

Daltski23/08/2010 16:10

Laura,

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".

Drew Wotherspoon23/08/2010 16:02

Daltski,

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 Wotherspoon23/08/2010 15:52

Thanks. OK then:

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.

Laura23/08/2010 15:43

"Only a well-rounded and consistently considered approach to these comments ensures that you remain a respected voice and commentator in any arena"

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!)

Daltski23/08/2010 15:35

Roy says here: "...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!"

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?

neil23/08/2010 15:26

Laura,

You absolutely can, we very much (genuinely) welcome debate. It's the swearing we don;t particularly like.

thanks

Drew Wotherspoon23/08/2010 15:18

"Charcol reserves the right to edit or delete comments."

What will be your criteria for that? Can people disagree with you? And criticise your positions?

Laura23/08/2010 15:13

RG,

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.

Drew Wotherspoon23/08/2010 15:01

Ray's position means that he holds no credibility regarding advice to either the public or the government.

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.

RG23/08/2010 14:43

The restriction of credit will help reduce property prices and make property more affordable. Free and easy credit has just created inflation in the house market which has benefited few people.

david barker23/08/2010 14:19

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