Things are better than expected. Time to put up rates!

So we have accelerating wage growth and productivity was up in the second half of last year. Luckily productivity is currently ahead of wage growth which is a good thing, but Bank of England forecasts are predicting wage growth to rise to 3% this year and to get ahead of productivity growth which is not so good. The path seems set for rates to hit 0.75% and the City is betting on this happening by May. So as the year moves closer to Brexit we start to crank up the risk factors.

We still don’t know what the Treasury model of the UK is making of all of the conflicting inputs including a forecast of QE withdrawal. Once this happens it should have its own impact on reducing inflation. But as Dame Minouche Shafik, previously Deputy Governor of the Bank of England reminded us on Desert island disks at the weekend, Economics isn’t a precise science given that we have to consider the behaviour of people. Wise words and a timely reminder that no matter how much the economic boffins tell us that they know how things work… the really don’t with any degree of accuracy. So when the Bank decides to increase rates let’s just hope that it considers the human factor.

Elsewhere in Europe we have the Italian elections next Sunday March 4^th. The rise of the right and anti-immigration parties are moving the elections towards a flash point with an engaged and angry electorate. We also have the German SDP postal vote on their coalition with Merkel’s CDU … and that might prove to be more important. Markets seem to be of the view that the Merkel leadership is unassailable and that things will carry on much as before. But that seems at best wildly optimistic. Voters are becoming increasingly disillusioned with the increases in immigration: since 2015 Germany has received 1.38mn ‘initial asylum applications’ and in the short term there has been a significant increase in crime according to a controversial government-commissioned study published by the Zurich University of Applied Sciences. So, as we continue to focus on domestic issues and the latest state of play of Brexit negotiations, it would be easy to miss the significant issues in Europe right now which just could have some major impacts on us. Whether we are in the EU or not.

What an interesting week!

What an interesting week we’ve just had and what does it mean going forward?

As a professional Treasurer and market pundit I’m supposed to be an expert on all market moves and with a coherent theory of what’s happening, why and what happens next.

Well I’m going to let you into a secret – reading the markets right now is pretty tough.

There are so many conflicting risks and issues in the market and the Global experiment with loose monetary policy and economic stimulus means that no one really knows what the consequences of all this is going to be. Don’t let anyone fool you into thinking differently.

We’ve had close to zero interest rates for some time – so long that many in market don’t realise that this isn’t normal. It isn’t! And in the UK alone we have had £435bn of QE which many feared would stoke up asset values and create rampant inflation. And by and large that hasn’t happened either.

Global investors have been chasing yield and this has not been possible through Gilts or deposits and so has helped fuel the spiralling price of equities. In the US, regardless of the political scene (some would say because of – I’ll let you decide), the economy is now growing well and, with almost full employment inflation, now beckons. This means rates will have to rise more quickly. At the same time the Fed is looking to reverse out QE which is giving fears that this will be bad for the economy and that Bull run on equities should end. Who knows if that’s true? And all this at a time when a new and economically inexperienced Chairman of the Fed has barely got his feet under the desk

But what of the UK? Last week the vote was to leave rates on hold but for Mark Carney to signal that rates will have to rise sooner rather than later. This is the Governor’s forward guidance that he is so keen on.  At the same time we have a possible withdrawal of both QE and the remaining asset purchase schemes such as TFS and all with the backdrop of the Brexit ‘fog’. Piling on risk and uncertainty is not good for consumer confidence or businesses trying to plan.

At an international level we will have to see if the Bull run has well and truly ended or whether this is just a temporary volatile period. Was it just the price correction driven by market fundamentals of an overpriced equity market or something deeper? What about the influence of High Frequency traders using AI for algorithm based trades? No one knows! Many will argue that fundamentals are still good and that this is just a market wobble that will soon pass. I’m not so sure. One to watch because despite our tendency to look inwards in the UK, we can’t escape the wider panics in Global Financial markets…as we saw in 2007.

TFS - End of an era?

It’s still so early in the New Year but already we have seen the end of the Funding for Lending Scheme – a cheap source of funding to banks and building societies.

Soon, by the end of this month, we will probably see the end of new borrowings under the ‘Funding for Lending on speed’ otherwise known as the Term Funding Scheme (TFS). This was put in place in August 2016 at the same time that Base Rates fell to ¼% and it was the Bank of England’s mechanism to ensure that the rate cut was passed onto borrowers. In essence, lenders could borrow under this scheme at Base Rate flat. Right now there’s nearly £107mn drawn under this scheme and it was increased in size as recently as November last year.

The effect of the TFS has been to fuel mortgage lending at subsidised rates and dampen the requirement  for more conventional funding such as retail deposits, securitisation and covered bonds.

So, assuming that TFS is not extended – there’s always room for a last minute reprieve – then what will this mean? Well for a start we will begin to see more competitive retail deposits. Good for savers but expensive for lenders. If a price war starts for deposits then not only will they get more expensive as a funding source but they may well start to become more volatile as deposits move from one bank to another chasing the best rate. That’s not good. Expensive and unstable. Definitely not ‘strong and stable’.

Securitisation and covered bonds should make a come-back. Since the credit crisis these funding mechanisms have been decidedly muted and we really need the large historical issuers such as Santander, Lloyds, Barclays and Nationwide to re-start their programmes in earnest. Although this could have the short term effect of increasing securitisation costs for everyone as the supply and demand dynamics cut in, medium to long-term this can only be good news as we finally get these markets back on track and focus investors on buying them. On the whole – I can’t wait for these distorting schemes to go. They were very important at the time and have done their job. Now we need to get back to business as usual. Finally!

And mortgage rates? Well they will have to rise to reflect the increased funding costs. Standby for some last minute cheap deals as lenders take their fill of remaining TFS availability. Make hay while the sun shines!

It’s a generation thing

The total value of housing stock rented to 35- to 49-year-olds across the UK has increased in value from £66bn to £363bn in the past 14 years, according to Savills estate agency. Previously, we would have expected people in this age group to have bought their first home.

According to Lucian Cook, Savills’ head of residential research, more people aged 35–64, either through choice or necessity, are now renting. “We’re seeing the lack of accessibility to homeownership that was confined to the under-35s move up into the next age group,” Mr Cook said. “With a finite amount of social housing stock concentrated in older households, a lack of access to owner occupation is not just affecting the under-35s but beginning to feed up into the 35–49 age group’

A substantial shift then in a relatively short space of time.

Further along the spectrum, Legal & General report that the shortage of suitable housing for older people in Britain is keeping homeowners stuck in properties worth £820bn, leaving 7.7m spare bedrooms empty. This research suggests that almost a third of homeowners aged over-55 have considered downsizing in the past five years yet only 7% have actually made the move. Just 2% of the country’s housing stock is designed with pensioners in mind.

The L&G study claimed that if all 3.3m over-55s looking to downsize could find suitable homes, the shift would unlock 18% of the country’s property market, worth £820bn. That’s a lot of housing stock which could – should – be utilised.

This made me realise that the issue we’re facing is not simply a lack of housing stock, it’s a lack of the right type of housing. We need intelligent planning that takes the changing nature of households into account.

Part of this thinking should be making downsizing an attractive and viable option for the over-55s. While affordability issues may still be prevalent for 35–49s in terms of buying rather than renting, it might ease supply, reduce house prices and offer Generation Rent a few more options.

Don't get hung up about Help to Buy

Among many other revelations on March 16^th in the budget the Chancellor announced that the Help to Buy (HTB) scheme would be extended for new build homes. This is the so-called Help to Buy 1  shared equity scheme rather than the guarantee scheme. So is this a mistake, stoking up a housing bubble further, a dastardly plot to get his hands on more stamp duty, a shallow political scheme to get more votes or a genuine move to continue support for a key component of the economy? To answer this you have to consider the financial assistance that has been provided in the round. Help to Buy is a relatively small component of this and that probably gives you a hint about where I’ll be going with this.

When the funding crisis kicked off in 2007 the UK economy, global banking system, mortgage markets and housing markets were facing a massive problem. Armageddon is not an exaggeration. And the Bank of England and Government dealt with it. Eventually.  Not to have provided any support doesn’t bear thinking about and any quibbles about potential housing bubbles are irrelevant against that backdrop.

In my view the two biggest forms of support for the economy , mortgage and housing markets are not HTB but instead are QE – some £375bn of which has been pumped into the system and Funding for Lending. But taken as a whole all of the schemes including HTB have played their part. In some ways the role of these schemes is to underpin confidence and looking at the markets and economic regeneration underway today that seems to have been achieved.

So is HTB likely to cause a bubble? I don’t think so. All of the feedback I hear is that the majority of users of HTB are outside of the superheated London and South East areas and are for loans of less the £300k and so the £600k limit could easily be reduced without effect. Is the Chancellor doing all of these things just to ensure the health of the housing and mortgage markets or does he have ulterior motives? Well who can know with certainty but the election is near. I stress again though, other stimuli is having a much greater effect than HTB in my opinion. Will it all end in tears?  Well I hope not for all our sakes but there are various levers that the Bank of England/PRA have – so called macro prudential levers and of course interest rates. I’m sure these will be used as and when necessary and with care so as to not cause unnecessary shocks. I don’t think the industry should get hung up about HTB in my view.

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.

Not to be written off

This week has seen the Bank of England publish utilisation data under the Funding for Lending Scheme (FLS) and the almost universal verdict that the scheme hasn’t worked quite the way it should have. Well I’m not in that camp. At least not at the moment.

Of all the schemes we have seen since the onset of the credit crisis, the FLS is the first one that targets lending to the real economy and incentivises banks and building societies to grow their lending overall. Unfortunately, although data has revealed a strongly growing list of participants in the scheme, latest count there are 35, net lending by FLS participants to 30^th September was +£0.5bn and total FLS drawdowns from the Bank were £4.4bn. However, probably unsurprisingly, the media headlines have focussed on the six largest lenders and the conclusion is different: overall lending across these lenders fell by £1.04 billion during the period.

So why is this happening and can anything be done to finesse the scheme? Firstly, falls in lending of the largest banks shouldn’t be a surprise. This group includes Lloyds and RBS, both of which are undergoing radical surgery and deleveraging. The fact that they are shrinking their loan books shouldn’t be a surprise. Secondly, many analysts claim that lending is being focussed on lower risk areas such as low LTV mortgages rather than areas that need help such as first time buyers. I am sure this is true.

Can anything be done about it? Yes but with difficulty is the answer. The FLS is a compromise. It was put together in a very short time and is basically a tweaked Special Liquidity Scheme. The obvious thing to do would be to tweak it a bit further and change the incentives to focus lending activity where it is needed. Although simple in practice I think this is unlikely to happen. The tightrope that the Bank of England had to walk was to balance the needs of the market within the constraints imposed by Europe. Yes Europe! To focus the FLS in the way I describe would almost certainly fall foul of the European State Aid rules and would be deemed to have provided an unfair advantage over other countries. Frustrating but there it is.

So the FLS is doing the best it can. It really is still early days and there are lenders coming on stream all the time. Some of the smaller lenders have already commented on the fact they are able to offer more competitive products on the back of the scheme which can’t be a bad thing. We need to give it some more time and assume that overall it is beneficial to the market. In my view we should be looking to the smaller lenders to make the difference to the key risk areas that need help and not the large banks who can’t or just don’t need to.

One to watch.

You can’t have it both ways

I was a little surprised to see Chairman of the US Federal Reserve, Ben Bernanke’s comments this week about how the overly stringent lending requirements of banks are hurting the US housing recovery. He said that ‘the pendulum has swung too far from the easy lending days of the housing boom complaining that ‘overly tight lending standards may now be preventing creditworthy borrowers from buying homes, slowing the revival in housing and impeding recovery’.

I’m not sure how timely these comments were given that the US Commerce Department subsequently revealed housing starts had risen to their high level for more than four years.

More importantly I’m not sure how helpful it is to suggest its time for lenders to relax their lending criteria at this time. Wasn’t much of the blame for the start of the Credit Crisis aimed at the US for being irresponsible and lending to individuals who hadn’t a hope in hell of repaying their mortgage from day one?

I’m not saying Mr Bernanke is advocating lending to credit impaired individuals but is it the right message to encourage lenders to relax criteria, especially since there are encouraging signs from the US housing market?

Sifting through the data - or a tale of mixed messages

There seems to be a fair amount of confusion out there at the moment with regard to how the UK economic recovery is going. We have Sir Mervyn King,governor of the Bank of England saying that the UK economy was recovering at a ‘slow uncertain pace’ and it was ‘not clear if positive indicators would persist’ whilst Charlie Bean, deputy governor of the Bank of England, seems much more optimistic suggesting that there were ‘reasons for optimism’ for the UK economy with real ‘signs of progress’.

Conversely mortgage lending seem to be picking up, with the Bank of England suggesting that mortgage approvals are gathering in pace, thanks in some part to the Funding for Lending Scheme, yet house prices remain subdued with the Nationwide Building Society predicting that the housing market will take some time to gain any sort of momentum.

It’s all very confusing and it seems daily we are getting a mixed bag of messages.

For what it’s worth I think that things will gradually start to improve in the UK economy next year and we will see more consistent data coming through. I also agree with John Cridland at the CBI who suggests that we need to get used to a ‘new normal’ of slower growth with annual expansion of 2% looking pretty good.

As for the housing market, I think that too will perk up albeit gradually. However I am concerned about the longevity (or lack of it) of the Funding for Lending Scheme. I think thus far, that it is has been a force for good encouraging banks and building societies to lend and probably assisted financial institutions to price more competitively. But what happens when the Scheme ends, currently pencilled in for 31 January 2014?

Food for thought….

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.

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 8^th 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

Reasons to be cheerful

Mortgage deposit levels for first-time buyers have fallen below 20% for the first time in three years according to the Council of Mortgage Lenders. Well that’s a reason to cheer even if it has only dropped to 19%. It’s certainly a step in the right direction.

Also encouragingly the number of high LTV products on the market has jumped during August, so says Moneyfacts. Some 36 new mortgage deals with LTVs of 85% or above were launched during the month, some way away from the disappointing numbers in July which fell away to 26. And during August five new products were launched with LTVs of 95%.

So maybe the Funding for Lending and NewBuy scheme is starting to kick in. I truly hope so. However I was disappointed that if the research from Rightmove is to be believed that the public perception of the NewBuy scheme is still very limited. The survey suggested that homeowners and first-time buyers have little knowledge of this initiative – some 34% first-time buyers and 51% of other home movers.

Rather disappointing. Think what could be achieved in lending terms if we could raise awareness amongst all interested parties. I guess it’s largely up to the Government to do this but lenders and builders alike should all play a part.

After all it’s great to have some positive news to report to our beleaguered first-time buyers at last!