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!

The return of competition

I read, without any surprise, that Tesco Bank has made the first set of rate reductions to its recently launched mortgage range, including their fixed and tracker mortgages.

I suppose by doing that, they are really throwing their hat into the ring.

If they want to be a serious player in the market, I guess they don’t have any other option. With the Funding for Lending scheme working now, some extra £80bn of funding is available for banks to lend direct to consumers so it’s hardly surprising that competition has returned to the market. Also, without doubt, helping competitive pricing is the record low bank base rate agreed by the Bank of England’s Monetary Committee. And this is unlikely to change for the foreseeable future – possibly until well into 2014.

So good luck to Tesco Bank.  I hope it builds their market share because I really think it is healthy to have newcomers out there challenging the existing lender model.

However I do hope they have adjusted their rates within the parameters of a properly worked product pricing model. All too often I have seen lenders set their product pricing as a knee jerk reaction to what’s happening elsewhere within the market. As a generalisation, I think more thought needs to go into setting the headline rate – and not only that but the criteria sitting behind the rate plus the service standards supporting it. (It’s all well and good to have a market leading rate but do you have the back up team waiting to process the application?). And will it contribute to shareholder value?

When Home Funding Limited started originating for German Bank Westlb back in 2007 we had an innovative product pricing model which we actively looked to share with our broker partners. This enabled us to have a win/win scenario with our distributors as they were proactively involved in pricing the product. We were able to originate genuinely bespoke products which challenged the market but also enabled us, acting on behalf of the lender, to offer products which were profitable.

I believe that with the right model sitting behind you, there really is the opportunity for lenders to come up with products that build market share and that make money.

Funding for Lending – the panacea?

I’m a little worried that commentators are already judging the success or failure of the recent Government and Bank of England Funding for Lending scheme without giving it a fair hearing. I’m not sure what good it will ultimately bring (but surely having this in place is better than having nothing at all) but realistically it is early days. After all the scheme was only launched in August and it will take time for applications, never mind completions to flush through the system. However already I have seen various comments from analysts suggesting that it will do little to help the first time buyer market. Moreover there are fewer deals around for higher loan to values than a year ago and this needs urgently addressing if we are to kick start the housing market.

It is a pity that non bank lenders and smaller banks and building societies will be unable to benefit from this scheme, particularly when those are the very lenders which are likely to be the ones to focus on the niche markets that we so desperately need to revitalise. Perhaps this can be addressed in time and I urge the Government to think again about this omission if they are going to get the money where it is really needed.

Whilst I agree that we need more money to flow into key markets it is understandable that banks are being cautious. Even with extra available funding, they are still more likely to adopt risk averse behaviour and ration their lending to a smaller audience of borrowers as a means of conserving balance sheets. 

So then it comes back to the question as to how we help those who have a deposit of less than 10% to put down? It is true that there is an issue here. Average rents are increasing and we are locked in a spiral as more first time buyers are locked out of the housing market so have to turn to the private rental market. Maybe we should wait to see how the Funding for Lending scheme pans out.  Then if it really fails to deliver and has done little to help this target market we maybe need to think of providing new ways to fund these loans. After all the demand is there.