As readers of our blog will be aware, we have been iterating for some time that we believe the housing market is now at, or very close to, the bottom. This has a number of positive implications, not least of which is that lender’s appetite to lend should start to increase, given the knowledge that their exposure going forward will be much reduced. 

The lack of mortgage products above 75% LTV has always been due to two factors: firstly a general shortage of funding and secondly, a reluctance to lend above 75% LTV given that property prices were falling with no clear view of where the bottom was. As the consensus grows that stability is returning to the housing market (see nationwide report issued today) we expect to see lenders gradually increasing the range and availability of products. Indeed some high level research we carried out recently has seen the number of lenders offering 90% LTV products increase from just 5 at the beginning of May to 9 last week. Not conclusive proof by many means but at least a step in the right direction.

Whilst the above may all be good news, the mortgage market faces an additional problem, that of trying to process the loans. In a previous blog entitled “so much dependent on so few” we highlighted what we saw as the looming processing issue. Essentially if you look who was actually doing the lending in 2007 and then look at who remains, there is a serious processing capacity issue. Approximately 90% of current business is being processed by just eight lenders.

 Below is the CML table of the largest lenders in 2007. Highlighted in yellow are those lenders where new originations have either effectively ceased or at a level far below their peak. Crossed through in grey are those lenders who simply no longer exist. Adding together the closed and non/under-lending, you lose over 42% of market capacity. This of course ignores the fact that all the Building Societies, inc Nationwide, are lending at significantly reduced levels from the peak. Exact figures are hard to come by but I would be surprised if the building Societies combined are currently lending more than 25% of their 2007 levels.

The issue of increasing dependence on a handful of large banks was highlighted last week in the Bank of England financial stability report (issue No 25). At 70 pages it is a long read that I would best describe overall as ‘cautiously optimistic’. There were contained within a number of interesting graphs that put numbers around issues we were all aware of but to date had nothing concrete that evidenced our views. The first graph that is worthy of note is the contribution of the major UK banks to the growth in overall lending (not exclusively mortgages) compared to foreign lenders.

Whilst UK banks are expected to now make up the shortfall in both mortgage and other lending, the infrastructure clearly cannot be expected to cope with such an increase in demand in such a short space of time. We are hearing and indeed many of the major lenders themselves are reporting major delays  and issues on the servicing of loans. Nearly all the major lenders have servicing issues from time and time, but for the major lenders to be struggling to cope with demand now, when gross mortgage lending at circa £145Bn is 40% of the market peak, is clearly worrying. If there isn’t the processing capacity, as well as service suffering, there is clearly less incentive for lenders to compete with lower margins. Margins themselves, again illustrated in the Bank of England report have reached historically high levels.

 As a result of this development, we are talking to the largest lenders about whether our new £10M computer system, which combines sophisticated credit checks with a 20 minute internet based mortgage offer could help. Still early days but watch this space.