As has been covered in depth by various commentators in recent weeks, there is strong difference between statements emerging from the Treasury and the Government and the requirements from the FSA over capital requirements. Lenders have increasingly found themselves caught between a ‘rock and a hard place’ with one side increasing pressure on the lenders to lend as against the increased capital requirements the FSA is insisting upon to cover the increased or perceived increased risk of existing and new loans.

With the seizure of the Capital Markets, increasing levels of bad debts (both mortgage and now corporate) and increased provisioning, the current results are all too apparent in the unavailability of mortgage products at present.

How to get the market moving

Tighter capital requirements and the disappearance of wholesale funding has meant dramatically increased competition for savings. This means that many smaller banks and mutual institutions, which as a whole contributed significantly to the UK mortgage market pre 2008, are now finding savings not only harder to come by but also significantly more expensive to secure. Additionally, slowing pre-payment speed on existing mortgages has meant less redemption income or put another way less cash circulating to be re-lent. The net result is that many, if not most of these organisations, now find themselves in a position of being only able to service existing customers with lending restricted largely to branch based or ‘footfall’ customers only. Unless there is a change is in either regulatory capital requirements and/or a re-opening of the wholesale markets, this is likely to be the position for the near term at least.

The ‘big 6’

If the smaller and medium sized lenders are effectively out of the equation at present it leaves the bulk of the lending requirement down to the ‘big 6’. HBOS/Lloyds, Barclays/Woolwich, Santander (Abbey and A&L), Nationwide, RBS and HSBC. However whilst on paper it appears that these lenders combined lending in 2007 contributed around 65% of gross lending, it does somewhat ignore the fact that HBOS is currently undergoing a merger with Lloyds, RBS has had to have significant capital pumped into it to keep it afloat to the extent that the government/taxpayer now owns 57% of it and Santander is going to be very busy absorbing both A&L and Bradford and Bingley.

An additional question also emerges with an increased dependence on the ‘big 6’, namely around processing and distribution. Whilst some (notably HBOS) have been very intermediary focused and have invested in point of sale technology, several of the largest lenders are still very manual/paper based and underwriter focused. Whilst you can argue the pros and cons of this approach from a risk perspective, what it does mean is that volumes are much more difficult to ‘flex’ given the dependence of paper and human beings. Given the events currently taking place, the ability of the largest lenders to take up the slack and effectively and efficiently process volume business, even if they wanted to, must be open to question.

Filling the mortgage ‘gap’

If the smaller and mid sized lenders are largely inactive and questions remain about the ability and willingness of the ‘big 6’ to fill in the gap, where could the additional lending required come from? As has been said many times before, if you want to go forward you sometimes have to look back, in this case not very far to 2006/7.

Northern Rock was the third largest lender in 2006 with £33 Billion gross advances and still the fifth biggest in 2007. Now wholly government owned, despite some redundancies the infrastructure still remains very much in place. Therefore instead of the government trying to incentivise and cajole existing lenders to increase lending, a very real and much more direct alternative would be to simply change the Rock’s mandate and allow it to re-commence lending on a commercial scale. As most intermediaries reading this article will testify, the Rock was (some criteria issues aside) very good at underwriting and processing loans in a fast and efficient manner.

Return of ‘The Rock’

To get the Rock lending again would mean either slowing down or temporarily suspending the repayment of the government debt, but as we are seeing all too clearly in the current economic crisis, it is a matter of priorities. Given the massive slow-down in mortgage lending and the knock-on effects on the economy as a whole, stimulating demand must surely take precedence over the timing of the repayment of the tax-payer. In light of this, the recent decision to wind down the Granite Master trust programs was very disappointing given the ability that these presented to continue to fund newly originated assets through the capital markets.

When Northern Rock was taken into public ownership, the world was a very different place. As has since become clear, rather than being an isolated example, the Rock was just an early casualty given its greater dependence on the wholesale markets. Surely given this, it is time once again for the government to look at all the tools at its disposal to increase lending and review the role and mandate of what was one of the UK’s largest and most efficient lenders