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.