MortgagesMay 15 2013

A slow recovery as the malady lingers on

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It prompted a question in my mind: how healthy is the UK mortgage market? Has it healed itself? We are more than five years into the adjustments that were needed to respond to the initial closure of global funding markets and the subsequent credit crunch. Is the patient back on its feet, or does the mortgage market face a long ‘healing’ process that is only partially complete?

The government continues to support new stimulus measures to help the housing and mortgage markets – a definite sign of an ongoing sickness. Most recently the Bank of England announced an extension to the period and scope of the Funding for Lending scheme. This adds welcome short-term certainty for business planning purposes, and supplements the Budget announcements on a twin-track Help To Buy scheme (equity loans and a mortgage guarantee).

However in recent weeks a groundswell of opposition, including the influential Treasury select committee, has emerged against the proposed Help to Buy mortgage guarantee scheme. This is due to be introduced in January 2014.

Personally I agree and think that the financial support to the mortgage market in the scheme is a risk too far, as I suggested in last month’s article.

It may have been perceived, originally, as a political vote winner alongside the economic benefits that could come from it. It was certainly the first step in a long ‘hearts and minds’ campaign. However, in my judgement, Help to Buy is just as likely to lose votes if consumer aspirations, indeed now expectations, are not met and their access to homeownership remains thwarted.

If the government continues to implement the mortgage guarantee scheme it would speak volumes about its perception of the short and medium-term health of the mortgage market. Despite regular market surveys that suggested an increase in activity in 2013, the stimuli of cheap funding and other government financial support are disguising the fact that homeownership is difficult to achieve. The overall homeownership level has now fallen to 64 per cent from a high of 69 per cent 10 years ago.

Artificially supporting higher transaction numbers, and underpinning house prices, could store up a considerable potential liability for taxpayers (and downside risk for new borrowers once the artificial market stimuli are removed). As this financial risk is better understood, I suspect borrowers will be less willing to transact (and, anyway, many remain ‘mortgage prisoners’ in their current loans so have little or no choice to transact). The government might succeed in maintaining the funding supply for mortgages but that is not the same as stimulating new borrower demand to match mortgage funds’ availability.

So how healthy is the UK mortgage market? There are many positive signs among the fundamentals. Past international comparisons of national mortgage markets have revealed the UK market was seen as one of the most complete (serving a wider range of borrowers), competitive (between lenders and through a vibrant adviser sector), and innovative (new products and technologically-driven sales processes through many distribution channels).

The market has retrenched since 2007 but many of these positive features remain. But they will have to operate within the new, strict regulatory structures introduced by the mortgage market review – common sense standards, prolonged sales processes, evidence gathering and record-keeping requirements.

Advice will be the norm in future mortgage sales processes, but it has yet to be seen whether the consumer ‘experience’ will be enhanced by the new mortgage rules. Consumer outcomes will be better if the effect is to discourage unaffordable borrowing, or it leads to a reduction in lending to marginal borrowers. However the corollary is that less borrower activity means that the mortgage market will not act as a meaningful stimulus to current growth trends in the economy, whether the government adds incentives or not.

The UK market has managed the closure of global funding markets and a credit crunch more successfully than many other countries – the US, Spain, Ireland are just some examples. However there continues to be a drag on the long-term health of the market from past marginal lending to higher-risk borrowers.

Low interest rates and the use of forbearance have kicked many borrowers’ financial problems into the long grass. However forbearance measures cannot continue indefinitely and lenders will also have to address the problem of interest-only mortgages as opportunities to do so arise. Short-term support measures have helped keep people in their homes but they have not resolved their over-indebtedness.

The speed and breadth of action to address legacy lending will depend on where the Financial Conduct Authority lands in its assessment of systemic conduct risk in the mortgage market. The FCA plans a thematic review of arrears management as part of its risk outlook priorities for 2013, which will shine more light in this area. It is also likely to raise the heat on some lenders with legacy loans where their borrowers are struggling to keep above water.

If the patient is ailing, will the incentives of cheap funding and government support accelerate the recovery in the mortgage market? I fear that the process of the major banks restructuring their businesses and shrinking will continue for longer than many have so far appreciated. New mortgage business has been concentrated in the hands of fewer lenders since 2007, with around 80 per cent processed by six major lenders.

It takes only one of these large lenders to reduce its mortgage appetite to create a gap in the market, and we have seen several turn off the business flow to shrink their new business at different times in the past few years. The mutual sector has filled much of the gap and continues to perform above its historic market share, with 27 per cent of house purchase loans last year. However with similar funding and regulatory constraints as the banks, there is a limit to how much new business mutuals can take on as a sector.

My conclusion is that the short-term fillip from the Funding for Lending scheme is akin to an antibiotic which will give the health of the market a boost, but do not expect it to ensure a long-term cure until some of the ill effects of poor past lending decisions have washed through the system. The mortgage market is better but it is not fully recovered yet.

Michael Coogan is ambassador and strategic adviser to Deloitte, chairman of Shaping Tomorrow and former director general of the Council of Mortgage Lenders.

Key points

There has been a groundswell of opposition against the proposed Help to Buy mortgage guarantee scheme.

Advice will be the norm in future mortgage sales processes, but it is yet to be seen whether the consumer ‘experience’ will be enhanced by new mortgage rules.

Will the incentives of cheap funding and government support accelerate the recovery in the mortgage market?