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
Date
| Number of Products available at 90% LTV
| Average Rate
| Bank of England Base Rate
| Difference
|
Jan-07
| 3148
| 6.20%
| 5.00%
| 1.20%
|
Jun-07
| 3481
| 6.51%
| 5.50%
| 1.01%
|
Jan-08
| 1541
| 6.72%
| 5.50%
| 1.22%
|
Jun-08
| 785
| 7.73%
| 5.00%
| 2.73%
|
Jan-09
| 179
| 6.24%
| 2.00%
| 4.24%
|
Jun-09
| 127
| 6.29%
| 0.50%
| 5.79%
|
Source: moneysupermarket.com
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 discussionswe
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
http://www.communities.gov.uk/housing/buyingselling/ownershipschemes/homebuy/HomeBuyDirect/ Back
183
Guidance from Communities and Local Government
http://www.communities.gov.uk/housing/buyingselling/ownershipschemes/homebuy/newbuildhomebuy/ 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", FT.com, www.ft.com/indepth/subprime 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
|