For the mortgage market, we should look back fondly on 2012. It was a year in which mortgage market activity remained stable, but arrears and possessions trends were surprisingly positive. Interest rates stayed low and residential property transaction numbers increased.
The government supported the housing and mortgage markets by a NewBuy scheme that promoted economic growth through new build, and a Funding for Lending scheme that encouraged lower-cost and broader-based lending to business and consumers. The FSA helped by publishing its final mortgage market review rules, ending regulatory uncertainty and putting in place a common-sense set of standards that should avoid the systemic risks we saw triggered in 2007 occurring again.
My expectation is that these positive trends will continue in 2013 with more lending, product competition, more active lenders looking for new business, and renewed interest in writing business with borrowers who have been excluded from the market in the past five years.
However, in the longer term, it is important to learn the lessons of the past few years. Last month the Council of Mortgage Lenders published a report, Where Do We Go From Here?, on how UK mortgage lenders see the mortgage market – past, present, and future.
This report will shape lenders’ attitudes to the mortgage market for the next few years. So what are the highlights? The report said that “most lenders do not regard current market conditions as normal”, but there are difference in views of what ‘normal’ should look like.
My view is that the mortgage market has now adjusted to the shocks of 2007/2008 and I expect future annual activity to be at about the same level as 2009/2011. However, the introduction of the Funding for Lending scheme means we will have higher lending in 2013.
The CML also focused on the question: what does a ‘good’ mortgage market look like from the lenders’ viewpoint? There were few surprises. The mortgage market has to operate efficiently within the housing market as a whole. Lenders fund private rental and social housing as well as home ownership so must serve the whole housing market.
We should look back fondly on 2012: it was a year in which activity remained stable, but arrears and possessions trends were surprisingly positiveA good mortgage market provides access – first-time buyers with reasonable deposits should be able to transact, and niche borrower groups should be served. The market should be flexible and offer value for both lenders and borrowers. Fundamentally the mortgage market must be safe, although everyone needs to recognise that this is not the same as being risk-free. Risks need to be assessed, understood and, where possible, mitigated.
Lenders have also commented to the CML on the main factors that cause problems and preclude a good mortgage market. For a long-term product, it is striking that the first influence is short termism – borrowers focusing on monthly costs and initial price, and lenders can at times chase market share with product pricing that does not match the underlying risk.
Problems also can arise by opportunism (effectively another type of short termism) and the impacts of complexity on the relationship between lenders and borrowers.
So, from the lenders’ point of view, do we have a good market? The resounding answer from many lenders was ‘no’. It is still not functioning properly. So how do we get there in the longer term?
This depends not only on actions by all participants in the market, but also leadership by government and regulators and rational behaviour by consumers. A long-term, cross political party view to align housing market objectives with tax, welfare and social policy objectives is central to progress in the right direction.
Political objectives must mirror, and complement, prudential and conduct risk approaches that the regulators are implementing.
What action does this mean for 2013 if we are to move closer to a ‘good’ market? Lenders will have already set their short-term strategies, and will no doubt have factored in the Funding for Lending scheme to assess their risk appetite and lending capacity in the next 12 months. Many will also continue to deleverage and address past selling issues, for example through effective forbearance strategies.
More broadly, there is widespread recognition that products need to be simpler and easier for consumers to understand.
It will be a year of change for the mortgage industry, but it will be also a year of opportunity for those firms ready to rise to the challenge.
Michael Coogan is ambassador and strategic adviser to Deloitte, chairman of Shaping Tomorrow Ltd, and past director general of the Council of Mortgage Lenders.
