23rd September 2010

Mortgage Market-infarction, life support required now

Gross mortgage lending has plunged 14% in August to an estimated �£11.4bn, the Council of Mortgage Lenders reveals. The figure is the lowest August lending since 2000 and drops from �£13.3bn in July with a 6% fall from �£12.1bn in August 2009.

The mortgage market has virtually "ceased to be" for IFA firms through a combination of near impossible lending criteria and blatantly anti-competitive practices such as dual-pricing by lenders who used to value IFA introductions and now choose to cut out the "middleman". As a result, large numbers of IFAs and mortgage advisers have gone out of business and many more will face the same fate in the next few years.

For those IFAs who have been around since the early Eighties, the current crisis in the housing and associated mortgage market is simply a case of Déjà Vu. This does not make it better though.

The early Eighties mortgage market was one where building societies reigned supreme. Getting a mortgage was not that easy and it was often a case of who you knew as much as what you knew that resulted in mortgages being obtained for clients. Many building societies operated on quotas and the 100% mortgage was a no go area for all unless you were a "Professional".

The need for higher LTV ratios came about because of higher house prices, inflation hindering savings and of course the British aspiration to own one's own home. This was overcome in part by way of an innovation offered by Insurance Companies called a Top Up. Monies were made available at a secured cost, and linked to an endowment product offered by the life companies who were part of the Top Up venture. A key player for example was SPI - linked to a number of Scottish life offices. Other variants came from Eagle Star.

Then came big bang and the banks got stuck in with a vengeance.

The first of the new breed of mortgage lender was born. National Home Loans led by Frank Butler and John Heron - ex Leamington Spa staff who knew what was needed in the market at the time and had the ability to arrange for funds to be available from the money markets - a new concept.

We had entered the brave new world of Interest Only mortgages with varying permutations, self-cert mortgages, low start mortgages, pension mortgages, currency mortgages. With it came Securitisation, again led by National Home Loans, the first UK lender to go "exotic" and ultimately "toxic".

More banks piled in from overseas, Chemical, Boston Safe, Royal Trust, Sumitomo, BNP, Citibank, Banco San Paolo and many others - all now extinct in the UK mortgage market and in some cases extinct full stop.

All these institutions were driven in many ways by that highly British aspiration to own your own home. They offered what the building societies did not - high LTV deals, reduced paperwork, no face to face interviews, and for the self employed the ability to self certify income. More importantly they overturned years of closed shop tradition in a very short space of time.

A cornerstone of the UK economy, a key driver to an economic feelgood factor is, was and will be the UK housing market. It was easy then to raise money, the economy was floating on a "Cappuccino" froth of debt but nobody cared because house prices were rising.

The dire situation the mortgage market finds itself in today is a classic example of extremes of knee jerk reaction.

Then came 2008 and it all ended in tears.

The big problem for mortgage lenders bundling what is now known as "toxic" debt was that the self-certification offering had become polluted by allowing very high LTV lending for the employed as well as self employed. It was often argued at the time that those employed with a provable income should not, do not need self-cert. That, even with the benefit of hindsight, was a correct criticism yet in collusion with the regulators, the greed of lenders eager for more market share were becoming more and more "flexible" allowing ever higher LTV, up to 120% lending, with the addition of deferred interest and higher income multiples.

The housing and mortgage market desperately needs help today.

It does not need the FSA and lenders conducting exercises akin to bayoneting the wounded by added regulation on one front, a shortage of monies on another (unless it is for the banks balance sheets) and the further tightening up of lending criteria.

Help should come in a number of ways. The banks, (forget the Building Societies, they were eaten alive by the Banks years ago) especially those bailed out by the state, should not use the cash injected to support balance sheets and casino banking, it should go to providing easier and sensible access to mortgage funds.

Lending should go up to a maximum 95%, on a full status basis and beyond age 65, in line with the current retirement age thinking. Those with good, clean track records should be able to switch lenders in a simplified way. The interest only mortgage should stay; after all it is what it says on the can. Any borrower who suggests they did not/ do not know that a repayment date with obligation is/was parked somewhere in space and time is frankly an idiot whose only hope of salvation is a claim of being badly advised directed at the FOS, who will of course find in their favour and put all their world to right again.

For the self employed, and Controlling Directors- the entrepreneurs the Government is so keen to encourage, retain and refine self certification of income as a mortgage and remortgage option up to a maximum of 75% LTV, this is important and vital at this time.

The self employed, and Controlling Directors are not normally paid completely on a PAYE basis, if at all in the case of the self employed or those in partnerships, their true income in a year may only be known some time after a year end after profits are calculated, dividends paid etc, those on PAYE know in advance.

Self-cert is not an opportunity to tell lies although no doubt it was subject to some abuse with the move to higher LTV lending to the employed. It is a way of utilising an income for borrowing purposes that is more closely related to an individuals true earning and purchasing power after receiving appropriate advice from their accountant.

I sometimes think that those involved in the regulation, design, trading and marketing of financial services products and instruments need to show control and a greater maturity in the way they operate. We see markets go up and down on a whim of sentiment or rumour, driven by highly paid individuals barely out of school with a better knowledge of the Gentleman's clubs and Champagne bars than that of the real world they wreak havoc upon when it all goes wrong.

Somebody passes wind in America and we end up having to flush the toilet and it will still not go away!

We see the housing market rise, and fall as is the case now, because of lack of mortgage funds, lack of sellers, lack of buyers and lack of confidence and job insecurity, a worse toxic mix.

When and how will we recover from this bank induced fiscal infarction?

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