No More FLS for mortgage lending

The Bank of England have today announced that they are refocusing the FLS from 2014 towards business loans and away from mortgage lending and I for one am pleased.

In fact I was surprised in April when the Bank of England announced an extension of the FLS through to January 2015 from the original January 2014 deadline.

Why should FLS for mortgages go? Well it has to be remembered that FLS was there to meet a crucial supply of credit and funding to the markets at a time when debt capital markets were still damaged from the Global Financial Crisis. It was necessary. But it was always the plan that this would provide funding until markets recovered. And there is plenty of evidence that markets are well on the way to recovery as recent debut RMBS issues from Precise and One Savings Banks have shown.

The market needs to get back to core funding: securitisation, covered bonds and retail deposits. It needs to be weaned off FLS and other forms of Government support and now is a good time. The UK economy is making good progress, debt markets are repairing and UK housing market activity is picking up. In some respects it’s all going too well and there have been signs of ‘credit creep’ and margin compression. Signs of a buoyant market. But as the Bank of England say today in their Financial Stability Report  “… risks may grow if stronger activity is accompanied by further substantial and rapid increases in house prices and a further build-up in household indebtedness, which is already elevated for some households. These risks would be accentuated if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles”.

 So together with the FLS announcement we have other measures being taken by the Financial Stability board by way of capital changes and credit stress tests and this shows that the markets and economy are being very carefully monitored and managed. Frankly this should give us confidence that the market is being managed to sustainable end shouldn't it? It does me.

Funding for Lending Scheme 2 – the Final Story?

As soon as the Bank of England said that the Funding for Lending Scheme (FLS) was temporary and would not be extended we should have known that change was on the cards. This has happened before with the predecessor scheme the Special Liquidity Scheme. Remember it?

When the FLS was first introduced, Sir Mervyn King said it could only be a temporary solution and must be used as a "window of opportunity" to "restore the capital position of the UK banking system". I guess it depends on your definition of temporary and perhaps underlies the problem we have with the banks and the economy not being in the state they need to be right now.

Much has been written about the FLS. Quite a lot of it negative in that it was a blunt instrument, wasn’t being used as intended and should have been made available to other lenders who might be more prepared to focus their lending efforts on the sectors that the government really wanted served: namely lending to SMEs.

I have written about the FLS as well. I have defended it when others have knocked it. I have recognised that it has done some good for all lenders whether directly or indirectly. The amount of liquidity it has provided has allowed Libor rates to fall to more acceptable levels without supply shortages pushing up rates. Yes it has been unfair in not providing support to non-banks although I think we have to recognise that the Bank is trying to provide solutions within existing frameworks (the Sterling Monetary Framework in this case) that have the biggest impact on the markets and economy possible without providing an unwieldy solution.

I have also argued that the FLS should cease when the Bank said it would because it is going to dampen the revival of the core funding markets – covered bonds and securitisation - that we really do need to see re-emerging in rude health. How will we know when to believe them when they really mean to withdraw it? Yesterday’s news won’t help on that score.

The other issue that the Bank has had to work around are the State aid rules. You can guarantee that any changes of the scheme to focus assistance to one sector or another will be scrutinised by hordes of apparatchiks sitting in Europe to determine whether this constitutes an unfair distortion to the markets.

But however they have done it, this FLS Mark 2, the “Super Improved” version has done just that: under the new deal, every pound of additional lending to small and medium-sized enterprises (SMEs) next year will allow the lender to access £5 of discounted funding from the Bank and in an effort to accelerate the flow of credit into the system, each pound lent to SMEs for the rest of this year will allow a draw-down of 10 times that in 2014. This shows how seriously they are taking it.

And what of the other announcement, that non-banks can have a look-in but not directly? Well I share some of the scepticism I have read online that this won’t work because trying to find a bank to act as a ‘conduit’ through to the FLS is going to be hard in practice. But better than nothing. At least there is a mechanism for access and the more imaginative among us can work with that. We have to remember, the Bank isn’t trying to be fair, it’s trying to find a solution that works in the way they need it to and quickly. Inevitably that means a tweak of the existing scheme rather than a wholesale re-write. That automatically rules out direct access for non-banks.

So having seen the original FLS, how will the sequel pan out? One to watch. I suspect we may not have heard the end of this one.

The Budget 2013 – the birth of a British Fannie Mae?

Well the Chancellor seems to have done well in achieving a balance with limited resources available. I’m sure a careful reading of the detail will reveal if this impression is correct or not. Very little room to manoeuvre given the deficit. Forecasts of increasing debt to GDP ratios from a current 75.9% to the mid 85% range by 2015 isn’t encouraging and with OBR reductions in both domestic and Eurozone GDP I think the Chancellor recognised that whilst he can’t throw his deficit reduction strategy out of the window he must do something to address the lack of economic  growth.

So it was interesting to see these initiatives mentioned: Funding For Lending (FLS) is due to end for drawings in January 2014 but it looks as though there may be extensions to this and also perhaps there maybe some targeting of the scheme to key risk areas such as SMEs and first time buyers although it will be interesting to see how this will be achieved without offending the Eurocrats and the State Aid Rules. Then there is the question of non-banks lenders and will they be allowed into a modified FLS? In truth, non-bank lenders are a very small proportion of the market today but it is just possible that by allowing them in the may have a disproportionate impact on key areas and much lobbying has been done to include them so we need to wait and see. I’m not surprised that the detail wasn’t mentioned today. Furious work will be going on behind the scenes as we speak.

Of mores significance to the mortgage industry will be the two schemes launched under the “Help to Buy” banner. The first is effectively an extension of the First Buy shared equity scheme aimed at all rather than just first time buyers. It looks like the Government is picking up the tab for al of this lending rather than sharing it with house builders but detailed information is scarce as I write this. The second is the modification of the New Buy scheme to give us our first “Fannie Mae” type of scheme whereby the Government is prepared to provide a guarantee for mortgage loans up to 95%. Importantly this applies to new loans, remortgages and second hand properties as well as new build. This is potential a game changing scheme providing the banks can get capital relief from the regulator. Is it a coincidence that this looks almost Canadian in its structure I wonder?

The Chancellor couldn’t resist having a go at the banks: the LIBOR fines being directed to the military should be a popular move and from a PR perspective is a mark of genius and the levy on banks will be increased for a sixth time to ensure lenders don’t benefit from a cut in corporation tax. Outside of the banking markets who will complain about this?

No change to deficit reduction focus and an attempt to stimulate growth in SMEs and the housing market make this a positive budget in my view. Time will tell. Now we just have to wait and see whether Standard and Poor’s and Fitch downgrade us.

Negative interest rates – is it really bad news?

There has been an awful lot of bad market reaction to Paul Tucker’s comments to the Treasury Select Committee earlier in the week that perhaps banks should earn a negative rate of interest on money deposited with the Bank of England.

He said that a negative interest rate would mean the Central Bank charges banks to hold their money and could encourage them to lend out more of their funds instead of hoarding it with the Bank.

Speaking to MPs on the Treasury Committee, Mr Tucker said: "This would be an extraordinary thing to do and it needs to be thought through carefully."

Banks have been quick to assert that if he does this then the consumers will pay with higher borrowing costs and negative deposit rates.

Why?

What he is suggesting may seem radical but is not as bad as it sounds. In my blog last summer (see http://home-funding.blogspot.co.uk/2012/06/how-central-banks-should-work.html) I talked about the tendency for banks to hoard cash rather than to put it to work as intended by the Bank of England. There is no reason to link Bank Rate (and hence Base Rate) to the rate at which the Bank of England gives on deposits with them. Indeed, couldn't you make a case for banks actually benefiting from the Bank of England’s initiative? If banks and building societies don’t hoard cash with the Bank and lend it out to companies and consumers, then aren’t they going to be earning more than they currently are? I know there is a return on capital issue to take into account but I’m sure banks can work that into the calculation of the correct rate to lend at. Mr Tucker’s ‘blue sky’ suggestion is not as daft as it may at first sound.

We need something to stimulate the markets and shouldn't discount these ideas. We still need a cunning plan to kick-start the market in my view!

Shifting sands

On the face of it the latest unemployment statistics look pretty good.

UK unemployment fell in the last three months of last year while the people in work jumped to a new record. The jobless total fell 14,000 between October and December to be 2.5m.  Total employment was up 154,000, up to 29.7 million. So good news.

So why is it that this is happening while the economy remains so sluggish?

As some analysts suggest, many companies are holding on to staff in the hope that an upturn around the corner. Some are even recruiting although I suspect not on any grand scale. However what is true is that redundancy rates are much lower than in the early 2000’s when growth was much higher.

Worryingly though if the number of people in work is rising and the economy remains stagnant it suggests that the British economy is less productive. So are we heading for a grim place where Britain is becoming a lower wage lower productivity driven economy? Unlike some economists I think not. But what is very apparent is that there is a huge change in demographics going on. Perhaps driven by necessity, more people than ever are becoming self employed or turning to part time employment.  The Office of National Statistics report that between October and December 2012, full time employment was 378,000 higher than in the April to June quarter of 2008, the first quarter of the recession. But part-time work was 572,000 higher compared with the same period.

In the near future I see this trend continuing. Something for economists to consider

Following the lead of the US

So the US economy unexpectedly shrank in the final quarter of last year by 0.1%. Bit of a shocker since this is the first time this has happened since the end of the recession in 2009. The Fed has quite rightly just called it a ‘pause’ due to transitory issues. Certainly it is true to say that the steep drop in defence spending, uncertainty over the fiscal cliff and the effects of the hurricane that swept up the east coast in November combined to hit growth. And these certainly are temporary measures; the US Conference Board acknowledged that ‘one-time factors put the number below the trend’.

I guess it’s interesting to see what the Fed has done about it. For a start it has kept its record low key interest rate between 0% and 0.25%. Furthermore it said that it would continue its $85bn a month bond and mortgage security purchases to support a stronger economic recovery. It said the easy monetary policy ‘will remain appropriate for a considerable time after the asset programme ends and the economic recovery strengthens’. What that says is that we are in for the long game. We are here to give assistance until things go back to normal. That’s what brings confidence back to the markets.

Whilst we are trying to emulate this in the UK I’m not sure we are going far enough. For instance the Funding for Lending Scheme which has done much to assist the mortgage lending market in the past few months is apparent that it is only a temporary measure and has a defined end date. Then what? We need some measures that have some longevity.

Some interesting lessons to learn this side of the pond perhaps…

A good idea but not necessarily the panacea

I see more scepticism in the press today about how effective the Government’s Funding for Lending Scheme (FLS) has been. According to recent statistics from a report by the Bank of England, lending to British companies by banks and building societies fell by £4 billion in the three months to November. Commentators are suggesting that the ‘jury was still out’ as to whether the FLS was bringing down bank loans as quickly as had hoped. What can be said of the scheme is that it has led to significant declines in the cost of funding to banks and financial institutions seem to be willing to ease borrowing rates among consumers. Availability of credit to households has increased plus rates on fixed rate mortgages have dropped so that has to be good news.

It’s not therefore lack of credit that’s an issue. It’s a much wider problem of subdued demand. Lenders report that a lack of confidence among businesses was affecting their appetite for debt.

From my previous blogs you know that I’m a big supporter of the Funding for Lending Scheme. It certainly improved mortgage approval figures at the back end of last year and will most likely have an impact on the level of gross lending going forward, driving many analysts to make bullish predictions for the mortgage market in the year ahead.

However there’s only so much this initiative can do. On its own I can’t see that it is going to solve the Chancellor’s problems as to how to unblock the corporate credit market. He has to suggest ideas that can rebuild confidence in a still very subdued market. Thinking caps on!

same old same old...

Once again we have conflicting data reported by commentators regarding house prices for 2012.

You have the Office of National Statistics (ONS) suggesting house prices increased by 2.1% on the year to November against both Halifax and Nationwide’s view reporting house prices fell by 0.3% and 1% on average in 2012. So who’s right?

Maybe this is inevitable as it is well know that the ONS, Halifax and Nationwide have different ways of recording the data so you can argue that there are bound to be variations. Having said that, I would expect the trend to be similar amongst housing economists and I’m not sure this was always the case last year.

So house prices up or down for 2013? Well some cheery news from the Royal Institution of Chartered Surveyors (Rics) reporting that members believe that house sales will rise in the first three months. Some surveyors seem to be so bold as to suggest that in some parts of the country we are indeed ‘over the worst’.   Well apart from London and the South East which has always reflected something of a price bubble I’m not so sure that these predictions can be validated elsewhere. Whilst it’s true that unemployment is falling, the economy remains depressed with confidence running low and limited growth in wages expected. So being more realistic, I truly believe that the property market will remain tough for 2013.

 Having said that I really think that the Funding for Lending Scheme is starting to do its job and increase the availability of mortgages which is no bad thing. Also lenders are starting to look at assisting first-time buyers with increasing their product ranges to incorporate higher LTV loans. So the supply is there.

 I’m just not so sure if the demand will match it.

Three cheers for Barclays!

I think it was way back in October last year that I wrote about the need for lenders to look at developing more innovative products in the first-time buyer arena. This was amidst a set of depressing statistics which suggested that it can take up to eight years for the average first-time buyer to save up for the required 20% deposit.

Whilst the Funding for Lending Scheme has proved to have made a positive impact in terms of increasing mortgage availability, with a 26% net balance of lenders reporting a rise in lending, it has done little to assist the more ‘risky’ high end LTV borrowers (notably first-time buyers). Lenders on the whole have admitted to ‘cherry picking', remaining cautious about who to lend to

So hats off to Barclays then for coming up with a product that really seems workable for this target market. Without going into too much detail, it means that provided parents can stump up 10% of the asking price of the property, their children will need to put down only a 5% deposit to qualify for the mortgage. The ‘Springboard’ mortgage will be available from next week and I think it will be appealing to the Bank of Mum & Dad. Why? I think the fact that to access this deal requires a significantly smaller savings vessel is attractive to the ‘squeezed middle’ unlike other schemes which have gone before which have require a much greater input.

This will hopefully open the floodgates to other schemes becoming available. After all this is the market which needs the most amount of help.