A lack of available funding is causing a severe and sharp downturn, not just in the housing market, but now in the economy in general. Whilst the lack of funding is being cited as the root of the problems, I think we all need to realise that to get the markets lending again is actually a far more complicated process than simply increasing available funds. Simply increased funding without addressing other areas is not on its own going to resolve matters. Whilst I will restrict my comments here to those relating to the housing market, many of the thoughts below are applicable to lending in general. To get lending moving again we need to address all of the following areas:-

 
The impact of restricted liquidity – balancing demand and supply

High (relative) mortgage rates - As can be seen, falling BBR, falling LIBOR and falling swap rates are largely failing to be passed on to consumers to anything like their full extent. As rates have fallen, tracker margins have widened and as I write, the best two year fix (with a large deposit) is around 4.0% (with most rates 0.50%+ higher) when 2 year swap rates are around 2.29%. With limited funding lenders have had to try to manage demand from both borrowers but also from savers. With wholesale markets effectively shut a number of major lenders are effectively funded from deposits only.  Competition for savings is fierce and with falling rates savers are now moaning about their returns (I must say I find this view rather strange – savings returns should be seen against inflation not in absolute terms – getting 3% on savings when inflation is arguably now negative is a better return than a year ago!).  In short, the benefit from lower interest rates is largely failing to get passed on. If mortgage rates remain relatively high, disposal income doesn’t improve and this in turn impacts spending in the general economy.

Falling asset values and increased risk

With funding in short supply, it is understandable that available funds go towards lower LTV/risk assets. However with house prices falling, even with sufficient funds, lenders are going to be reluctant to lend above 75% (60% is now the new 75%) when due to continuing property price falls, the LTV in a year’s time could be significantly higher. Simply pumping money into the markets doesn’t resolve this issue and government initiatives to date have focused on creating liquidity for lower risk/lower LTV assets for a handful of the largest instituations. Without available funding above 75%, falling asset values has the potential to become the ‘perfect storm’ as values continue to fall as FTBs and others without a 25%+ deposit can’t enter the market.

Lenders tightening criteria or put more aptly, often closing the stable door after the horse has bolted…

As brokers will testify, rates and availability are far from the only issues. The end of the credit boom has seen a drastic pulling back on criteria. Whilst some of this may be sensible, many of the loans written in the last few years (and performing well), can now no longer be re-financed. Far from preventing new ‘bad’ loans being written, the new reality is that many loans written in the boom years are now effectively stuck on more expensive SVRs. Far from now preventing poorer quality business being written, (simply because most of it already has), the new criteria actually risks the opposite in turning performing loans into non-performing. The following broad areas have come under ‘criteria attack’

Restrictive loan sizes – Not only are some of the ‘best’ deals below 60% LTV, many are also capped at £250K or £500K. This ensures that available funds are spread amongst more customers but penalises the higher end of the housing market
More restrictive criteria - One way of managing demand is through price, the other is criteria. This is a lot less transparent than rate, but it is fairly obvious to most in the industry that lenders have tightened credit rules/scores and tightening general lending rules.
Lower income multiples – As most lenders now operate Debt to Income Calculations (DTI), these are again a very opaque way of reducing demand and also an attempt to belatedly manage risk. We have heard of numerous examples of clients attempting to remortgage only to be told that they now “can’t afford it”, despite the fact that they are borrowing the same amount as previous, earning more than they did 2+ years ago  and switching to a lower rate!

Property valuations - From bull to bear…

The final issue is one for surveyors. Whilst many could arguably be accused of over-valuing in the good times (hindsight is wonderful thing), the opposite would now seem to apply in many instances. A lack of sales comparables may not be helping, but with potential concerns over PI insurance and undoubted pressure from lenders, we are hearing of many instances where (anecdotally) properties are being down-valued over and beyond where the current market would indicate. This is obvious a very nefarious area but increasing comments from brokers and some estate agents are that the rather than just simply pricing to where the property stands at present, future falls in value are also being priced in when lenders should and indeed are taking further falls into account in their maximum LTVs.  Whilst from a lender’s perspective caution appears to makes sense, the fewer customers able to buy or re-finance the greater the ultimate fall in prices.  

Breaking the cycle – Getting lending again

Whilst the above issues are complex, one thing is clear. To get the market moving, intervention is clearly needed and not just on the funding side. Without this we risk prices falling further and faster than is justified and risk a subsequent bounce back once the market returns (an end or some controlling of ‘boom/bust’ house prices must surely be a priority once we have tackled the current problems).

If lenders can’t be persuaded or calljolled into the higher LTV end of the market and to relax some elements of criteria, some form of insurance needs to be offered to them to cover their perceived risks. We have mentioned before the role of Mortgage Indemnity Gaurantees or MIGs previuolsy and their role in the early 1990’s down-turn. In the midst of a recession, persuading private insurance firms to step in at anything like a reasonable premium looks unlikely. However a simple solution (relative to the myriad of proposals thus far) is for the government to offer lenders insurance on loans above a certain LTV for a fee. This would not only encourage lenders to lend but would also reduce the level of provisioning they would need to hold against future losses thus freeing up more money for lending

This would, from the perspective of all parties, be a commercial venture. If defaults are much lower than expected, (which may well be the outcome if MIG helps stabilise the lending and housing markets) the government makes a profit. Either way lenders can lend with the certainty that losses or a percentage of losses above a certain LTV are covered. Governments underwriting lending to consumers should always be a last resort but it should be remembered that the government is already in this space via the Homebuyers scheme . Without this step however we very much fear a longer and more painful downturn than is necessary.