Reflecting on 2012’s mortgage market

The BBC’s recent Panorama highlighted what it described as “Britain’s hidden housing crisis”. It followed the plight of four homeowners as they lost their properties. The victims included a divorced grandmother with cancer, a man whose business had failed, and a banker who ended up sleeping rough.

Despite the gloomy picture painted by the programme, figures from the Council of Mortgage Lenders (CML) suggest a more positive outlook (as shown in Table 1).

It had forecast 45,000 repossessions during 2012, but the final figure is expected to be around 10,000 fewer than that. The CML attributes these lower figures to low mortgage rates and lender forbearance. It predicts around 35,000 repossessions for 2013.

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At the other end of the spectrum, the CML notes that low mortgage rates have also contributed to another emerging trend: a growth in outright home ownership. It suggests that many borrowers have taken advantage of low interest rates to overpay their mortgages, reporting that a third of loans taken out since 2005 have been overpaid.

Analysis of mortgage data and the 2011 census returns by Hometrack indicates that around 47 per cent of homeowners own their property outright. It estimates that, if current trends continue, there will be more outright owners than those with mortgages by 2014/15.

First timers

But ironically owner occupation is falling as first-time buyers (FTBs) struggle to get a foot on the housing ladder. A survey of CML members published at the end of 2012 reveals that lenders feel they are on the horns of a dilemma when it comes to FTBs.

The report acknowledges, for example, that the cheap, loss-leading products of the past were neither rational for lenders nor beneficial to post-crisis borrowers. The CML admits that today’s mortgage pricing is not just determined by the current costs of funding, capital and distribution, but is a reflection that some lenders need to restore the strength of their balance sheets damaged by their previous pricing models.

However, while the pre-crunch market sought growth at the expense of controlling risk, current market conditions reverse that trend; the market is seeking to control risk at the expense of growth. Lenders believe that risk-based pricing is the “right thing to do”.

It makes good business sense, is built into the regulatory system, and promotes the stability of the financial system. But, from a consumer perspective, such an approach has a perverse outcome. It charges those who can least afford it – such as FTBs – the highest price, effectively excluding them from the market.

Lenders feel unable to meet the needs of FTBs and non-standard borrowers and are concerned that regulation may permanently exclude some legitimate borrowers from the market, leading ultimately to a reduction in home ownership. Nevertheless, the CML also reports that the number of FTBs is likely to have exceeded 200,000 in 2012, the highest level since 2007 and may well top that figure in 2013.

Some believe the successful mortgage business models of the future will focus on holding on to good-quality borrowers in the long term, rather than the short-term goal of attracting new ones. That could lead to a shrinking remortgaging market as lenders seek to retain high-quality business. It also has implications for the working relationship of brokers and lenders and the handling of direct sales.