Mortgage arrears and access to mortgage finance - Treasury Contents

5  Mortgage Finance

Trends in mortgage lending

100.  Gross mortgage lending is at its lowest level for almost ten years.[160] As the Bank of England outlined in its first Trends in Lending publication, restricting credit to households could cause an even deeper economic downturn.[161] We heard evidence about the state of mortgage lending today and how this has affected first time buyers. We also reflect on the future of the sub-prime sector. A question which needs to be addressed is whether the risks to the stability of the mortgage market caused by lending to less credit-worthy borrowers are offset by the benefit of allowing more to realise the dream of owner-occupation?

101.  According to data from the Bank of England, the key factor contributing to falling gross mortgage lending is a sharp decrease in remortgaging activity.[162] Lenders have attributed this decline to low standard variable rates, which makes remortgaging relatively unattractive.[163] The Bank of England in their June 2009 Trends in Lending report, added that low house prices contribute to diminished demand for remortgaging, as some borrowers have insufficient equity to be able to get a mortgage with a different lender.[164] The House Builders Federation told us that lenders "are looking for any reason to refuse a loan" and that credit scoring had become increasingly restrictive.[165]

From feast to famine

102.  A number of organisations told us that a return to former levels of lending, such as 125% loan-to-value (LTV) mortgages, would be undesirable.[166] However, Which? believed that the current scarcity of credit for mortgages was a cause for concern.[167] This had been particularly difficult for first time buyers, an important group in the market if the housing market is to recover, as the CML noted.

The position of would-be FTBs [first time buyers] is very important for a lasting recovery of the housing market. Until the funding position improves materially, market conditions are likely to remain difficult and any upturn hesitant.[168]

103.  In its written evidence, Which? expressed concern that first time buyers were having difficulties entering the housing market because of a fall in availability of 90% LTV mortgages.[169] There are fewer than one tenth the number of 90% LTV products today compared to one year ago.[170] Which? also informed us that substantially higher margins were being charged on those 90% LTV mortgages that are on offer, and the rates charged on 90% mortgages were significantly higher than those for 75% LTV mortgages.[171]

Table 2: Number of products available at 90% LTV and difference spread between average rate charged and the Bank of England base rate
Number of Products available at 90% LTV
Average Rate
Bank of England Base Rate


104.  The mortgage lenders explained how current incentives created by credit rating agencies and the FSA prevented them from offering higher LTV mortgages. Mr Coles from the BSA described how larger exposure to higher LTV lending might increase the likelihood of a lender being downgraded by a credit rating agency.[172] A serious consequence of such a downgrading would be to increase the lender's cost of borrowing from the wholesale market.[173] Mr Coles told us that having a large proportion of high LTV lending might also encourage the FSA to take "severe action" against the lender because the FSA's stress tests assume a very severe reduction in house prices.[174]

105.  Both the industry representatives and Government told us that they believed the number of 90% LTVs would increase in the future as stability and confidence returned and house prices rose.[175] However, in the interim before an economic recovery, there is a worrying lack of opportunities for first time buyers. Which? informed us that the requirement for a 25% deposit would act as a significant barrier to entry to first time buyers, with savings of £31,000 needed on a house at the average price for a first time buyer.[176] In London this figure rose to £51,000.[177] The CML have anecdotal evidence to suggest that 80% of younger first time buyers relied on relatives for financial support when paying deposits. John Healey and Lord Myners both noted that renting was rapidly becoming the preferred option for young people.[178]

106.  Some evidence suggested policy solutions to help first time buyers get a foot on the property ladder. The CML advocated cutting stamp duty.[179] Which? suggested that the Government could insure the additional risk for 90% LTV mortgages to encourage lenders to offer them more readily.[180] Peter Williams from IMLA told us there was little interest from industry or the Government in these insurance schemes. Lord Myners supported Mr Williams when he stated that providing insurance of this kind was not a matter for the Government and that the private sector would offer insurance if they thought it would be profitable.[181]

107.  The Government runs a number of schemes which are designed to help people get on the property ladder such as HomeBuy Direct where first time buyers are helped to move into new properties by being offered an equity loan of up to 30% of the purchase price,[182] and the New Build HomeBuy scheme whereby new homes are offered for sale where individuals buy a share of their home and pay subsidised rent on the remaining share.[183]

108.  We received only very limited evidence about the HomeBuy schemes. IMLA criticised the schemes in England for having unclear aims and limited monitoring of performance. It also noted that the scale and the content of the schemes were constantly changing. Mr Healey emphasised that these schemes were designed to encourage home building and that he believed they could achieve this and help first time buyers.

109.  Mr Williams, Deputy Director-General of IMLA, told us there was an "unprecedented" shortage of mortgage finance[184] and his views were echoed by others, including Ms Bennett from the CML.[185] The Communities and Local Government Committee has recently examined a Government scheme designed to encourage lending, namely the Government's Asset-backed Securities Guarantee Scheme. This scheme aims to improve access to wholesale funding for banks and building societies.[186] We have not taken much evidence in this area but note the conclusions of that Committee:

According to the evidence we have received, the Asset-backed Securities Guarantee Scheme, one of the most important of the weapons in the Government's armoury for tackling the effects of the credit crunch on its housing policy, is not working. [187]

Existing borrowers

110.  Which? highlighted in its written evidence how the mortgage market failed to operate in consumers' interest.[188] Specifically Which? highlighted the fact that, because of falling house prices and tighter lending criteria, some consumers were not able to switch mortgage providers in search of a better deal.[189] This issue is pressing as the CML told us that there will be 1.6m deals maturing in the 18 month period from the start of 2009 to mid-2010, a substantial number given there are 12m mortgage customers in the UK today.[190] Evidence from Shelter stated that borrowers needed a sufficient choice of affordable mortgages.[191] A lack of available good value rates for consumers who were coming off short term deals might lead to an increase in arrears and repossessions as consumers' costs could increase significantly when deals expired. The CML told us that lenders were working hard to discuss potential future payment shocks with borrowers when their fixed term deals expired.[192] One issue of importance is the timing of these discussions—we are unclear whether they occur before the consumer chooses the fixed term deal or soon before the deal ends when monthly payments may increase. Shelter emphasised that re-mortgaging should not push borrowers to arrears and repossessions.[193]

Competition in the sector

111.  We received mixed evidence about the state of competition in the mortgage market. On the one hand, we heard from Lord Myners that there is a "very competitive market for mortgages",[194] while Mr Williams from IMLA described the UK mortgage market as "not fully funded or competitive at the moment".[195]

112.  Which? supported the view that competition in the mortgage market had weakened,[196] citing as evidence the spread of variable mortgage rates over the Bank of England base rate. Mr Jon Pain from the FSA informed us that the specialist lender section of the mortgage market had become "virtually non-existent" which might further damage competition in that market.[197]

113.  First time buyers face barriers to getting on the property ladder, such as high deposit requirements and restrictive lending criteria. While we are not advocating a return to past levels of lending, it appears that more needs to be done to help credit-worthy first time buyers access credit. It is likely that restricting some first time buyers has negative effects on an already depressed housing market.

114.  It is vital that consumers understand that their mortgage payments will vary over time, especially during a period when interest rates are far more likely to go up than to fall. This is the responsibility of lenders and this is a matter that should be enforced by the FSA.

115.  We are concerned that decreased competition in the mortgage market could lead to unfair practices towards consumers. The FSA need to be vigilant in their supervision of lenders to prevent anti-competitive practices.

The future of the sub-prime sector

116.  In an earlier report, Financial Stability and Transparency, [198] we included the following definition of sub-prime mortgages:

Sub-prime mortgages are loans made to borrowers who are perceived to have high credit risk, often because they lack a strong credit history or have other characteristics that are associated with high probabilities of default.[199]

117.  Sub-prime mortgages are regularly blamed for starting the present financial crisis. For example, the Financial Times states that "the rising defaults on sub-prime mortgages in the US triggered the global financial crisis".[200] We asked FSA representatives about whether the sub-prime sector should be closed down.[201] Mr Pain emphasised that in the Mortgage Market Review, the FSA would consider the sub-prime lenders' mechanism for raising funds and whether consumers who used specialist lenders needed more protection.[202] He remarked that affordability was the key issue for the FSA, and that consumers should enter the mortgage market knowing that they could sustain their mortgage payments over the lifetime of the mortgage.[203] He told us that many lenders were using "sophisticated tools" which could assess true affordability, but that the whole mortgage market should adopt these techniques.[204]

118.  Evidence from IMLA stated that in recent years the sub-prime sector had accounted for 10-15% of the total volume of mortgages in a year.[205] They noted that firms in this sector were funded through the capital markets via securitisation where they sold their mortgage debt to other lenders, as opposed to obtaining funding from deposits.[206] Jon Pain commented that the capital market funding channel was now effectively closed and the sub-prime sector of the mortgage market had virtually ceased to exist.[207] Mr Pain informed us that arrears levels in the sub-prime sector were higher than in the mainstream mortgage market, and added that this was to be expected. He stressed that while the arrears rate for specialist lenders was near 10%, that implied 90% of borrowers in this sector were keeping up with their payments.[208]

119.  Arrears rates in the sub-prime sector are higher than those in the rest of the mortgage market. We note that the current sub-prime arrears rate of 10% is likely to rise given that arrears are predicted to increase. However we acknowledge that there are borrowers who use sub-prime lenders who are able to sustain their mortgage payments. We agree with the FSA that the important issue is for all lenders to consider the affordability of a mortgage for each potential customer. The FSA should ensure that all lenders perform adequate affordability tests, approved by the regulator, and improve their understanding of borrowers' ability to repay.

160   Bank of England, Trends in Lending, June 2009, p 8 Back

161   Ibid., p 4 Back

162   Ibid., p 8 Back

163   Ibid., p 8 Back

164   Ibid., p 8 Back

165   Ev 101 Back

166   Ev 67, 134  Back

167   Ev 67 Back

168   Ev 80-81 Back

169   Ev 67 Back

170   Bank of England, Trends in Lending, June 2009, p 9 Back

171   Ev 68 Back

172   Q 184  Back

173   Ibid. Back

174   Ibid. Back

175   Qq 184, 312  Back

176   Ev 67 Back

177   Ibid. Back

178   Qq 325-326 Back

179   Ev 81 Back

180   Ev 67, 69 Back

181   Q 312 Back

182   Guidance from Communities and Local Government Back

183   Guidance from Communities and Local Government Back

184   Q 189  Back

185   Q 188  Back

186   "Statement on Financial Intervention to support lending in the economy ", HM Treasury press notice, 19 Jan 2009 Back

187   Communities and Local Government Committee, Eighth Report of the Session 2008-9, Housing and the credit-crunch: follow up, HC 568, p 14, para 28 Back

188   Ev 67 Back

189   Ibid. Back

190   Q 263 Back

191   Ev 134 Back

192   Q 179 Back

193   Ev 134 Back

194   Q 316 Back

195   Q 180  Back

196   Ev 67 Back

197   Q 259 Back

198   Treasury Committee, Sixth Report of Session 2007-8, Financial Stability and Transparency, HC 371,  Back

199   Speech by Chairman Ben S. Bernanke, at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois, 17 May 2007 Back

200   "In depth: Sub-prime fall-out",, Back

201   Q 259 Back

202   Ibid. Back

203   Qq 261-263 Back

204   Q 246 Back

205   Ev 86 Back

206   Ibid. Back

207   Q 259 Back

208   Q 261 Back

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Prepared 8 August 2009