tony's blog

Tuesday, June 29, 2010

A step into the unknown

George Osborne’s bank levy to raise £8.3billion in four years rightly made budget headlines last week. Part political opportunism, part economic necessity, this measure was met with broad public approval. After all, no-one is going to begrudge the Chancellor his swipe at the banking sector whose stock among the public both literally and figuratively is at an all time low. What’s more this move will meet with international approval as politicians across the globe implement schemes like this to recoup losses and make a point.

This figure at first sight appears considerable but in the context of likely bonus payouts by the banks over the same period I suspect will be manageable. More worrying may be its impact on their capital bases. With wholesale funding remaining tight the levy must be accurately judged so as not to undo the repair to balance sheets that is currently underway. And while the banks will benefit from cuts in corporation tax too this levy must not make operating in the UK unattractive compared to other jurisdictions given its reliance on Financial Services.

The expectation of many is that banks such as Lloyds, RBS, Barclays and HSBC will shoulder the lion’s share, the very banks that are (with Santander) exclusively writing the UK’s current mortgage business. With access to wholesale money still difficult demands on capital remain acute. How they choose to accommodate the levy may have consequences for their lending activity. The levy is a political and economic gamble which will exact a modicum of revenge for the excesses of the past but we must hope not at the cost of future mortgage lending.

Thursday, June 10, 2010

Death by a thousand cuts?

The budget promises death by a thousand cuts but if it’s light on detail at the end of June then more will come in the spending review. This is even more likely following the announcement by Fitch, one of the world’s biggest credit rating agencies, warning that the Government must cut spending by some £86bn, equivalent to the entire NHS budget, over the next five years to maintain Britain’s reputation with international investors. Fiscal policy sends signals to markets and citizens alike about a Government’s intent and will tell us how fast and how profoundly we are willing to tackle the deficit. In this case the Government must act decisively and quickly to avoid the danger of falling into a double dip recession and to ensure that World opinion of the UK remains positive.

As mortgage practitioners, we are all reading the runes to determine when the market will get back to something resembling normality. While fiscal measures will affect confidence, in the form of likely job security – specifically in the public but also the private sector – wages and the abolition of certain public service projects, monetary policy is equally important to the long term health of the home-owning market.

Interest rates have been on hold at record lows for many months now, effectively putting money back into the pocket of borrowers on SVR or tracker rates. Should wage inflation kick in then interest rates will go up and the pain for thousands of borrowers will become more acute. Of course a burst of remortgage activity may be no bad thing but remember that many borrowers on interest only mortgages may not be in a position to find a like for like affordable deal. Indeed more and more lenders are turning away from interest only mortgage deals with some encouragement from the FSA and any remortgage is likely to be locking a higher margin for the lender than the product that it replaces. We have already seen, over the last couple of years how supply has not been able to meet demand. Total number of mortgage products available in the markets is today less than 15% of the number that were available in the peak of the markets and there are none for the credit impaired market. Interest rates have never been a subtle tool as they treat the UK as a homogenous economic unit when in fact what it feels like in London is not how it may feel in Nottingham. Nevertheless, millions would be affected by a rise in interest rates and so whatever fiscal measures are adopted, monetary policy will still play its part.

Thursday, June 3, 2010

small advisors beware!

Only last week, an ex colleague approached me for advice. A relative who runs a small Directly Authorised firm had been given thirty days by the FSA to stop trading, hire a Compliance Director, or find a home as an Appointed Representative of a network. Without being privy to the facts of this particular case, it is my guess that he is not alone. You might not like it but you could understand if the FSA privately regards small DA’s as inconvenient and costly to regulate. This poses the bigger question, why would you want to be Directly Authorised in the current mortgage market?

When mortgage regulation arrived almost ten years ago, many suggested up to 20% of a DA’s time would be redirected into regulated matters, at a substantial loss of turnover, and the time to process any sale would increase owing to paper work. That is a stretch for any small business. Throw in subsequent initiatives from regulators, networks and lenders alike (TCF,MMR,RDR, I could go on)and you can quickly see how being a small DA might feel like running through treacle.

As a result of more sophisticated means of monitoring, many DA’s, who may once have considered themselves too small to bother the FSA, now enjoy even greater vigilance and policing from the regulator. Lost time, increasing regulatory fees, and falling mortgage and insurance income will present small DA’s with a strategic decision. My advice is to make the choice before it is forced upon you.