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.

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.

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.

When markets get things wrong!

It doesn't happen frequently first of all. Indeed, it’s fair to say the market's collective wisdom is far more perceptive than the views of those who individually constitute it. But from time to time it does get things wrong, losing touch with the real economy of people.

There is form for this. I am sure the credit crisis will be taught in years to come as yet another example of boom and bust along with Tulip mania in the 18th century and the South Sea bubble in the 19th century to name but two.

On a lesser scale but prominent to city watchers nevertheless, was the prediction of the bond markets on election night that a Tory majority was a racing certainty – even in the face of bookmaker odds and Exit polls. So what should we make of clamour among investors that a strong stable government is what the UK needs as soon as possible lest we all go Greek overnight?

The history of UK economic misfortunes is littered with self fulfilling dark prophesies from the markets but with their recent track record you can forgive people for not taking them as seriously as perhaps they should. Financial Services has burned too many bridges of late with the general public. Our politicians have been reminded to whom they are accountable and there is need for the newly formed Con-Lib coalition to prove itself to the people pretty quickly.

Having said this commentators readily admit that the chaos in Europe is affecting markets far more than the seemly transition of power here. Indeed our politicians are behaving in a way you certainly could not guarantee of the markets - it’s all very grown up.

The ongoing misfortunes of our European neighbours are more serious than the transfer of power at home. After all, prior to the election, all the parties (and electorate) were already committed to cuts and reducing the deficit. The arguments now are about timings and priorities, not the need to deal with it. The markets will continue to point out that this instability is difficult. What do they want, an easy life? Time to earn their corn methinks! The message to the markets is, we hear you but wait your turn.

Is there a doctor in the house?

World financial markets are far from recovered. While the Germans try to administer very unpleasant medicine to Greece, other countries among the PIGS (perhaps they need a Vet) risk getting the symptoms of contagion. Yields on Portuguese national debt, for example, are heading north at an alarming rate.

It was once said that when the US sneezes the rest of the world catches a cold.
The credit crunch demonstrated the alarming truth of that. But the pressing issue now is one of rebound. If Greece effectively keels over (how can that be allowed to happen?), we all will feel the resulting impact on the global banking system. We just can't afford to have that level of destabilisation so soon after finally getting things under control again. The downgrading of Greek national debt to junk status by Standard and Poor’s is bringing havoc to markets with some traders privately admitting that anything that is offered up now is “too little too late.” Liquidity is fragile and this will do nothing to help the global flows of capital as banks will rush to protect their positions, shore up their capital adequacy and become paralysed while they reconsider new strategies. The flight to quality is in full swing.

If the PIGS were to go under the consequences for global capital flows would be profound and this just can’t be allowed to happen. No country in today’s world is isolated and the illness of one is felt by all.

Politics, politics........

And so it starts. 

As I write this week, political parties of all colours are launching their manifestoes, blitzing the media, and indulging in the inevitable mudslinging that leaves you under no illusion that a general election has started.

Interestingly, never before have decisions about the future of our industry had so many ramifications for our ability to do just about anything else. Whether defence, health, or education, the financial crisis is now affecting our view of how much or how little we can do with all these important areas of public policy.

The Financial Services industry and the City of London in particular, have become amongst the most important features of the UK economy. But the financial crisis has focused everyone’s critical faculties (some greater than others) on its contribution. Of course, there have been and continue to be considerable benefits for UK plc from our industry, but, as we have now discovered there were also major systemic risks which spilled over into the rest of the economy. It is the job of politicians as policy makers to cut the risks relative to the benefits. But, short of sound bites about bashing bankers, and more regulation, little will be heard about this.

This is a shame because the mortgage market faces decades of instability unless the Government addresses the impending funding gap, which will widen by a further £312bn with the cessation of the Govt special schemes in 2012 and 2014.  


Industry insiders are all concerned by the scale of the problem facing mortgage lenders if wholesale funding continues to be difficult to come by. There is no silver bullet to this funding issue. Retail funding is as vulnerable to market change as any wholesale model, is too small in relation to the overall funding gap and is inherently short-term in nature when what the markets requires is a medium to long-term funding solution. Given, the volumes of maturing debt, as well as the need to continue new lending, there is a case for the Bank of England to extend the SLS, or better still, replace it with a long-term liquidity mechanism and work with the industry to allow securitisation and covered bonds to be seen as attractive and safe instruments for investors again.


Most recent comment by both Mervyn King and Lord Turner give some encouragement in this regard.

Parties will trade blows over cuts, the timing of cuts, and headline giveaways. But my overall impression is that the electorate will remain unaware of the major economic choices and their ramifications. 

Perhaps that suits us, perhaps it does not. I worry that in this election, too many may be fiddling while Rome burns.

The real test will be to see what has changed by this time next year

First of all, my thanks to all the contributors and attendees at this year’s Mortgage Funding Conference. Initial feedback and coverage has been very positive. My thanks are also due to Sidley Austin for their sponsorship of the event.


I am particularly pleased as the conference was the first of its kind since the credit crunch gripped the industry. My aim is to establish an ongoing collaborative event – a ministry of all the talents if you like - that can highlight, discuss and maybe even resolve the issues that are affecting everyone. From time to time the vested interests of financial services need to put differences aside and pull together so it was gratifying to see all manner of market commentators: lenders, distributors, bankers and regulators in attendance in full voice.

Our overall aim then is simple: to move towards a fully funded and competitive mortgage market underpinned by an increasing number of mortgage lenders ready, willing and able to lend, or to lend more.

The lack of a level playing field was a theme that ran through many conference addresses and perhaps unsurprisingly, the lack of action from the authorities in support of wholesale funding markets and the broad range of mortgage lenders was criticised by many speakers.

My own view is that we cannot expect guarantees in this market from the government. But there are postives, as Robert Plehn, head of structured securitisation and covered bonds at Lloyds Banking Group, noted in his excellent presentation. While a RMBS guarantee scheme set up by the UK had not been able to be put into practice, it did represent a “tipping point” for investor sentiment towards UK RMBS as it demonstrated that the government was willing to act in support of the asset class.

Other highlights included Rob Thomas’ passionate defence of wholesale funding noting that the necessary guarantee of retail savings deposits by the Chancellor had shifted the balance unduly in favour of retail funding. Indeed the FSA is continuing to accentuate this bias in its pursuit of lower wholesale funding ratios as part of their change to bank and building society rules for maintaining liquidity. These actions in isolation never seem as bad as when considered in their totality.

On a positive note we should also welcome the fact that Mervyn King and Lord Turner have recently endorsed the importance the securitisation and covered bond markets: Lord Turner said only last week that “securitisation will continue to play a significant role in the credit intermediation process and ... could perform a socially useful function of enabling improved risk management.”


It seems to me that we are moving on and the high attendance at this conference and positive feedback received proves that there is commitment to diversified and robust funding across the industry in one shape, form or another. The real test will be to see what has changed by this time next year.

One thing is clear: we need more mortgage lenders to be active in the market than there are today and this means getting the funding markets working efficiently again with a diversity of funding sources or we are in danger of markets (and I mean both the housing market and wider economy) wallowing in the doldrums.