The Council of Mortgage Lenders has gone so far as to publish 10 snapshots of an improving mortgage market to demonstrate that it is “open for business”, and to reinforce its reasons for expecting continuing improvement in the mortgage market.
On balance, I tend to share this optimistic view that transactions and new lending in 2013 will be higher than last year.
Yet, we should be cautious. Borrower demand could remain fickle as a triple dip recession is in prospect. We also do not know how much of the inflow of cheaper money from the Funding for Lending Scheme will go to help businesses rather than consumers.
Also, as recent research by the Resolution Foundation shows, there are significant dampening features that impact on the number of people who can transact - “On borrowed time: Will household debt undermine economic recovery?” published in December 2012.
The report asks the question how far does the overall household debt level (some £1.25 trillion), and the distribution of debt among low and middle income borrowers, impact on the economy and future UK growth prospects? The Foundation has launched further research on “Deconstructing Debt” to “consider options for paying down debt that will both support families and allow a return to sustainable economic growth”.
We know that the government is fixed on its policy of tackling the fiscal deficit, and that many banks are deleveraging (not just a UK phenomenon), which may have contributed to the UK economy not growing as anticipated last year.
Recent reports also show that many borrowers who have benefited from low mortgage payments in the last few years, as a result of a long-term base rate of 0.5 per cent, have reduced their household debts. However, this picture is patchy so, this month, I have been reviewing the published FSA data to review the legacy issues to be resolved before the market can fully support economic growth.
At the same time as publishing the final mortgage market review rules in October 2012, the FSA published a Supplement to PS12/16 comprising a Data Pack on the mortgage market. It is illustrative to quote some of the figures, trends and current context for mortgage borrowers.
For example, we will soon reach a point where the number of outright homeowners will exceed the number of owners with a mortgage. Will these outright homeowners transact in the market?
Unless and until we develop an equity release market that commands confidence among banks and building societies, and provides lending opportunities to match other mainstream mortgage products, we will continue to have the problem that households cannot access their wealth without moving home. The FSA report says that, in 2011, there were just 19,000 equity release sales worth £840m.
For existing mortgage borrowers, the short-term prospects will depend on their credit profile, recent history, borrowing segment and loan affordability. As we know, self-certification and credit impaired products are no longer offered in the market. Therefore, past borrowers who took out these loans can find themselves “mortgage prisoners”.
The FSA report shows that these are not the only customer segments that would have difficulty in transacting. First-time buyers now in negative or low equity positions, self-employed borrowers, financially stretched interest-only borrowers, right to buy customers, borrowers who have missed payments in the economic downturn, are all customer segments that may struggle to get new finance.
By March 2012, the FSA estimated that up to 45 per cent of borrowers who had taken out a mortgage since 2005 could be “mortgage prisoners” as a result of tightened credit criteria and slimmer product ranges, and this percentage is even higher in some regions. In Northern Ireland, over 60 per cent of borrowers are affected (accentuated by house price falls which has worsened negative equity levels in the region).
One of the good news stories of 2012 was the comparatively positive performance of arrears and repossessions trends. However, the FSA report suggests that the full picture may be masked by the use of forbearance, may not fully reflect regional and customer segment variations, and does not take into account the possibility that the trend could reverse quickly when base rates rise.
The FSA analysed the transactional and performance data in detail and concluded that approximately 20 per cent of outstanding regulated mortgages as at March 2012 could have missed payments either currently or in the past. Also, taking into account their estimates of forbearance by lenders, the FSA, estimates that the proportion of regulated mortgages with current arrears or payment shortfalls could be as high as 9.7 per cent.
These estimates apply when the base rate is 0.5 per cent. When base rate rises, the picture would worsen.
Which customer segments are at most risk? Not surprisingly, there is an overlap with the groups on which the Resolution Foundation is focused. Single borrower households often took out interest-only loans to increase the amount they could borrow before the credit crunch. If these borrowers lose income, financial difficulties can build up quickly.
The FSA also identifies about 5 per cent of borrowers whose interest rates have increased over the last five years, and who are more likely to have current arrears or payment shortfalls.
A major group is comprised of interest-only borrowers who, in response to historic house price increases, took out larger mortgages than they would have been able to afford on a repayment basis. The FSA will shortly be publishing its thematic review on past interest-only loans. In the meantime, in the Data Pack, it estimates that around 41 per cent of all loans secured on homes are currently on an interest-only basis. Since the MMR, interest-only loans have become a niche product as new sales of these loans have fallen dramatically in response to the new regulatory environment.
Other current borrower groups have problems at present – the FSA estimates that around 59 per cent of self-certified loans to self-employed borrowers have a record of payment problems, and the self-employed are therefore more likely than employed borrowers to have their homes repossessed.
And it is not easy for first-time buyers to enter the market due to buy-to-let investors typically being older (45-64 compared to 31 on average for an FTB), typically being higher rate taxpayers (compared to an FTB average salary of £34,000); and typically being more able to afford and access finance (typical loan of 55 per cent LTV compared to 72 per cent LTV for FTBs).
It is no surprise that the buy-to-let market has continued to perform well in recent years, and this is set to continue. However, the number of existing borrowers who are struggling financially, have limited scope to transact, and face an uncertain financial future, is sufficiently large to continue to be a drag on economic recovery, as the Resolution Foundation has identified.
The public policy solutions to address this market weakness will be debated increasingly in the months ahead, but there is no simple solution to some of the legacy challenges facing the mortgage market. Therefore, while 2013 will be better than 2012, I remain to be convinced that this improvement will continue once the Funding for Lending Scheme is withdrawn.
Michael Coogan is Ambassador and Strategic Adviser to Deloitte, Chairman of Shaping Tomorrow Ltd, and past Director General of the Council of Mortgage Lenders.
Key points
In recent weeks we have had relatively positive forecasts for 2013 from various commentators on the mortgage market.
One of the good news stories of 2012 was the comparatively positive performance of arrears and repossessions trends.
It is no surprise that the buy-to-let market has continued to perform well in recent years, and this is set to continue.
