tony's blog

Friday, October 19, 2012

Getting by with a little help

Interesting survey from the Yorkshire Building Society out this week which suggests that 56% of potential first time buyers are concerned about how long it would take to save up for a deposit to buy a first property. The research goes on to say that it can take up to eight years on average so probably a lot longer if you live in London.

It also says that 7% of potential buyers plan to go to their parents to ask for extra help and almost a fifth of first-time buyers who had bought a home in the last year told the study they had had help from ‘the bank of Mum and Dad’ with their deposit compared with 13% of people who bought a property five years ago.

Two things come to mind. Eight years is a long time to save up for a 20% deposit so perhaps more should be done to help this largely disenfranchised group to get on the property ladder. I think this is an area that the current Funding for Lending scheme doesn’t really address in its present form, positive though the initiative is. Maybe the scheme could be refined to assist this group - it’s a segment of the market that is presently being overlooked. Lenders should be incentivised to target the higher LTV brackets with appropriate products.

And secondly, shouldn’t we as responsible lenders look at developing more innovative products for promoting shared ownership? The market is obviously out there so it makes perfect sense to invest our time and ideas in this area.

There are shared equity initiatives which we could and should exploit.

Wednesday, October 10, 2012

Reasons to be cheerful part II

Despite the IMF’s gloomy outlook for UK GDP this year there is some good news in the funding markets.

Last week I chaired the CML annual funding conference – their 8th and the sixth of which has been held since the credit crisis kicked in. In recent times it would have been easy for this conference to take on a gloomy air, but this time we had some unequivocally positive news to discuss: Where there were some 10-20 Residential Mortgage  Backed Securities (RMBS) investors a year ago (down from literally hundreds before 2008), we are now more than likely looking at 150 or so today and this number is growing. As a result of this, we now have increased demand from investors lowering costs for issuers.  

So investor confidence has improved. But why are investors deciding that RMBS could be a good thing? Well apart from having to find somewhere else to invest bearing in mind that gilt and cash returns are low, defaults in UK RMBS are negligible (0.01% UK RMBS defaulted)*.

Although the UK economy is still in the doldrums, it has not ‘blown up’ or even threatened to do so. We now have the ability to take whatever steps perceived necessary to ensure that the right measures are taken. Having said that, the economy remains in intensive care: it is under scrutiny and active management. I expect, as does the market, that further tweaks to policy and support will be necessary.

The Funding for Lending Scheme (FLS) has played its part too in that it has eased markets considerably and brought down interbank LIBOR rates.  What made this happen? Well the major banks and building societies are not issuing covered bonds or issuing securitised paper to the extent that they were because they don’t have to – they have access to the FLS. This puts banks in a more dominant position from a supply and demand level and this has driven spreads down marking a profound shifting in pricing in the last month. These developments could certainly allow the markets to function meaningfully once again. We now have the very real situation where issuance of RMBS is a cost effective funding mechanism once more and is close to the overall cost of borrowing under the subsidised FLS. Benchmark deals issued recently by Yorkshire Building Society through their Brass No 2 programme and Investec though RMS26 have shown this to be the case.

So what next for securitisation? The stigma that securitisation had is certainly fading and the track record of UK RMBS speaks for itself. Let’s hope the Bank of England sees this and gets behind these positive moves. Personally, I still think the Bank could provide more help to the market through the provision of permanent liquidity facilities to support RMBS and covered bonds. They have already shown themselves to be important components of banks funding and have been resilient in their performance despite the naysayers. And importantly, this wouldn’t cost the taxpayer a penny.


*Source: Standard and Poor’s