When is it going to get easier?

When is it going to get easier?

In the true spirit of optimism we always think things are going to get better. 2009 was an annus horribilis in terms of mortgage volume. 2010 was supposed to be 10% or so better. Well if you had bet on this I think you ought to try to hedge now. As it looks rather like gross lending may even be lower than last year. It is hard to be cheerful about 2011's prospects when the majority of the volume lenders are nervously eyeing the end of the government's Credit Guarantee Scheme and the Special Liquidity Scheme when the government won't accept the lenders "IOU" vouchers any more.

Once you've got over digesting that then it is worth considering the Mortgage Market Review, clearly from a regulatory aspect things are going to be more challenging. We've also got to get to grips with a new approved persons regime. So is it time to pack our bags? Well if you read the comments sections on most of the bad news stories on Mortgage Introducer and other trade press web site, you don't need to bother as a large number of industry colleagues are already doing this. Undoubtedly some people won't make it through the approved persons regime but I think the suggestions that this could be 20% plus of the industry as exaggerated. The number of drops out will be significantly lower, maybe 5-10%. The fact that lenders will have to put all of their advisers through the approved persons regime and the fact that FSA scrutiny remains on non advised sales mean that it will be more expensive for lenders to distribute loans directly so the numbers of direct staff will reduce. So the thing to remember is that if people are leaving the industry, there are fewer advisers serving the greater public. Whatever lenders do with dual pricing, the public wants advice so they will seek brokers. We just have to hope that lending falls by less than adviser numbers. Whilst I don't think HSBC will embrace intermediaries in the short term, I think it will slow down its mortgage ambitions over the next couple of years. Whilst other lenders huff and puff I seriously doubt any of the major intermediary lenders will stop dealing with brokers. The MMR's more onerous requirements may push lenders to reduce the number of intermediaries they deal with. This will make the life of the small DA broker even harder. So the next time you think, "is this all worth it?" just remember everyone else is having the same thought and a good few people will think "no", so in time that should make your life easier.

Working together

There seems to be a popular misconception that if the Conservatives win the election then a few days later the lights will be switched off at the FSA building and we will be able to carry on working without its interference. Whilst after Nick Cleggs's stellar performance on last weeks televised part leaders debate the chances of a Tory victory went down slightly we need to set out our expectations at a realistic level. Even if David Cameron and his growing family walk through the door of their new home in Downing Street sometime after 6^th May, we will be working with the FSA for the foreseeable future.

The problem that the FSA has is that it is stuck in the middle of a terrible mess, it gets blamed by everyone for everything. The credit crunch and thus the recession, house price increases and subsequent falls, allowing self cert and then proposing its scrapped, bank bonuses etc. the list just goes on and on. At the moment it is between a rock and a hard place on lending. Reading its response to the MMR it isn't keen on individual product regulation, maximum LTVs and LTIs, however our politicians, keen to blame mortgages for the credit crunch, seem hell bent on bringing in as much product regulation as possible. Northern Rock's Together mortgages are, according to some, the root of all evil but if you take Northern Rock's cumulative losses on these mortgages then it's a drop in the ocean compared with RBS losses on the purchase of ABN Amro and HBoS's mainly property linked corporate losses. Product regulation is not the answer and is a slippery slope and to its credit the FSA realises this and is doing its best to resist.

I think in the mortgage industry our greatest problem has been a lack of understanding between the intermediary sector and the FSA, however this is not a result of any deficiency of the work of AMI which does a great job of representing us. Sadly trade bodies are quite happy to point the finger at brokers and say "its all their fault". The good news is that the FSA has realised that it needs to engage with brokers and is keen on undoing the damage. The small firms section of the FSA's website is very simple and easy to use. People like Lesley Titcomb are very accessible and keen to engage and despite the reception she got at last years Expo, she still comes out to speak at broker events where she and her colleagues welcome feedback. We are all very critical of the FSA when it adds staff numbers to its already substantial team however it has been trying very hard to recruit from the broker industry. I know at least one broker who has gone there and another who joined from AMI. The FSA has been running adverts on trade press web sites to try to attract more brokers. If it really thought brokers were the cockroaches of the industry and something to be exterminated it wouldn't bother. It would simply recruit from the vast pool of unemployed graduates. By recruiting former brokers it shows it is putting its (or rather formerly our) money where its mouth it. The more brokers who work there the better the understanding it will have of us.

We need to accept that things will never go back to the way they were. Light touch regulation is as dead as a dodo. Heavy blunt and invasive regulation is going to be the way forwards. If we sit back and throw rocks at the FSA and carry on with the Millwall mentality of "we're brokers, no one likes us but we don't care" then our jobs are going to be a lot harder as the regulation which will be imposed will not only be heavy, blunt and invasive but it will also be impractical. If we take the view that we need to continue to fight for our industry and that we need all the friends we can get, the closer we work with the FSA, the more honest and constructive our feedback is, the more workable the regulation will be. The FSA knows it isn't perfect but it has shown it wants to work with us so we need to meet it halfway.

Mortgage chicken..

No one will be surprised by the news that the MPC has kept the base rate on hold at 0.5% for the 11th consecutive month. Whilst borrowers with tracker mortgages will be delighted to see the bank rate remain untouched, those borrowers sitting on their lenders standard variable rate will be keeping a close eye on their letterbox. In the past month we have seen Skipton and recently Norwich and Peterborough increase their SVRs. With building societies struggling for funds, I doubt these will be the last SVR increases we will see. Borrowers on other lenders SVRs face a financial version of chicken as they sit tight on a nice low rate hoping they will be able to remortgage away at the last minute before they get hit by rate rises.
With more and more borrowers considering remortgaging, one important area to note is that any increase in remortgage volumes will reduce funding for purchases, as overall mortgage funding is so tightly constrained, any reduction in the volumes of funding for purchases is likely to have a negative impact on house prices.

Yawn, base rate on hold

No one will be surprised to see that the Bank of England Monetary Policy Committee has decided to keep the base rate on hold at 0.5% for the seventh month in a row. The chances of any other decision were pretty minimal to say the least.

Borrowers on standard variable rate are sitting tight enjoying their low payments at present there is not much incentive to consider remortgaging for those lucky enough to have a decent level of equity in their properties. For those taking out new mortgages, the fixed vs. floating decision is not getting any easier.

Whilst it is good to see that lenders have passed on cuts in swap rates to short term fixed rates there seems to be little change for borrowers taking out long term fixed rates. 2 year swap rates have dropped by 0.21% since the last MPC meeting and whereas 5 year swap rates have dropped 0.3%. However since the August meeting, 2-year swaps are down by 0.50% and 5-year swaps are down by a massive 0.6%. Those borrowers seeking long term security are being forced to pay a sizeable premium over those who are happy to take floating rates, many of whom are now getting deals below 3%.

The lenders trade bodies have been busy educating us, to tell us that lenders funding costs aren’t linked to 3-month LIBOR which has levelled out at just above the base rate but market conditions have improved considerably in the past 2 months and the cost of fixed rates compared with floating rates is directly linked to the price of swap rates which have plummeted. Lenders need to price longer term fixed rates realistically to avoid pricing risk averse borrowers out of the market.

Aug MPC meeting Sept MPC Meeting 7th October 2009
2 year swap rates 2.26% 2 year swap rates 1.96% 2 year swap rates 1.75%
5 year swap rates 3.67% 5 year swap rates 3.37% 5 year swap rates 3.07%

Cost of mortgage funding

There is an interesting report which has been published by the BBA trying to educate borrowers on the cost of mortgage funding. It argues that the cost of funding for mortgages isn't linked to LIBOR it is linked to the savings rates being paid by banks. I do understand that the relationship between LIBOR and mortgage rates isn't as clear cut as it was before. Indeed the misery of the collapse of Lehmans has damaged the idea that banks can always borrow at 3-month LIBOR, lend it out for 25 years and simply roll it over each time it comes up for renewal. Borrowing short and lending long, isn't the money printing process it used to be. However LBG's securitization last week showed the market that there are investors out there but they want a decent return (almost 2%) over LIBOR. LBG have also given a put obligation at year 5 so that note holders can demand repayment from Lloyds at that time. I guess the mortgages included in the securitization are at mega low LTVs.

 

The report from the BBA points out that the majority of mortgage lending is being funded by savers rather than from wholesale funding. Up until this point the report seems to make sense but the contentious bit in my humble opinion is that apparently banks are paying savers 2-3% over the base rate for savings and that's why mortgages are so expensive. Whilst if you look at the savings best buys there are rates that start with a 3 for instant access accounts but I am sure if you look at the current rates being paid to savers, then these are substantially lower, indeed many savers aren't getting any interest at all. Most savers don't churn their account every couple of months to find a better rate. The best rates are only available on newer accounts; all of the older historic accounts are getting next to nothing. Banks seem to phase out accounts, shut them to new depositors and then reduce the interest rates paid on them over a period in time.

 

I would love to know what the average rate being paid for our nation's savings book; I am sure less than 2% and probably less than 1%. It would also be fascinating to know what percentage of the savings book actually churns. Whilst saying banks are paying 2-3% over base for savings isn't incorrect, it is only going to be for a very small proportion of the total savings book.

 

Here is the address of the report. http://www.bba.org.uk/content/1/c6/01/66/09/Cost_of_Funds_BankFact_-_FINAL.pdf

Ministry of Disinformation

Today's Bank of England Quarterly Inflation report makes for rather somber reading. It doesn't deny there are some green shoots out there but it does that the economy won't start to recover until the middle of next year.

This rather contradicts the governments forecast of a recovery starting later this year. The report also suggested that the economy will shrink by a terrifying 4.5% this year. This is significantly worse that the figures that Alistair Darling gave us in the budget 3 weeks or so ago.

According to the budget this year the UK ’s GDP is going to fall by 3.5%, next year it will grow by 1.25% and the following year back up to 3.5% growth. However The IMF thinks it will fall by 4.1% this year and by 0.4% next year. Only this time last year Alistair thought the UK ’s economy would grow (yes he was predicting growth in 2009) at 2.75% and in November last year this was slashed to a prediction of a fall between 0.75% and 1.25%.

So in the space of 3 weeks either the outlook for UK PLC in 2009 has deteriorated by 1% or the governments figures were rather optimistic (again)

Our chancellor's economic forecasting rather reminds me of Mohammed Saeed al-Sahar, also known during the second Gulf Way as Comical Ali. He was the infamous Iraqi Information Minister who regaled TV audiences with quotes such as "There are no American infidels in Baghdad. Never!." and "They're coming to surrender or be burned in their tanks."

Sadly though I think he is a lot more trustworthy than our chancellor and his predictions are likely to be a lot closer than Alistair's Disneyesque idea that there will be happy ending for all of us just around the corner. Fortunately for him Alistair's abilities to change his addresses 4 times in 4 years to maximise his expenses and to be able to claim almost £10,000 in stamp duty seem to be keenly honed. It's a shame he can't work the same magic with the economy.

Banks squash green shots

Over the past few weeks there have been more and more positive stories, whether its been more cheerful estate agents or mortgage approvals and some indices have shown house prices stopping falling. This coupled with more daylight in the evenings and some decent weather has felt like we have stepped out of a very dark winter, blinking in the sunlight with a whole summer ahead of us.

Most of the UK are stakeholders in the property market or some kind, whether they work in the property sector, whether they own or whether they work for a bank which has a large exposure to the property market. The group of stakeholders who hold the property market in their hands is the banks. The market will live or die by their actions (or lack of them).

Todays figures show that mortgage lending by the UK's major banks fell for the first time in four months in March, squashing any thoughts of a spring housing market recovery. The number of mortgages approved for house purchases fell to 26,097 in March, down 6.8% from February and 25% lower than a year earlier. The British Bankers' Association, which produced the figures, said it expected fluctuations during a recession. worryingly it added that savers were also reluctant to make more deposits with interest rates low.

These figures should inject a bit more realism into the market, the positive news of the last month shows that in some areas things aren't getting worse and in some cases are improving, however the housing market has a long way to go before a sensible sustainable recovery starts.