Stephen Knight, Executive Chairman

The Treasury Select Committee recently reported on lenders’ practices when it comes to mortgage arrears.  They expressed concern that some lenders were not being sympathetic enough to borrowers in areas such as securitisation and high LTV lending.

There was certainly some substance to the Committee’s findings, and we don’t deny that securitising lenders might be swifter to repossess than a High Street lender.  The issue is however, what benefits borrowers most?   Choice, or six lenders dominating 80% of the market, which is what we have at present?

Put simply, securitisation converts a savings product for big institutions into a mortgage product for the man in the street.  In-between is a contractual relationship between investor, issuer, lender and borrower that is more complex than borrowing in your High Street. 

What the Treasury Select Committee did not address is whether the extra funding and product competition available through securitisation is worth the different conditions that need to apply, because institutions surely aren’t going to invest in mortgages if borrowers have to be given unlimited time and flexibility in which to renegotiate the payment of their loans.

Today, August 2009, is a good time to judge the situation.  For a variety of reasons, securitising lenders are out of the equation.  The only source of mortgage money are a handful of High Street lenders, some of whom are offering abysmal service.

Twenty five days to issue a mortgage offer?  Technology is currently available to produce an offer in twenty five minutes.  When we pointed this out to a lender recently, it just shrugged its shoulders and said the equivalent of “No competition means we can take as long as we like”.

Current estimates are that gross advances will be £145bn this year versus £368bn in 2007.  This is a 60% decrease in availability.   Existing borrowers might be experiencing a sympathetic approach to arrears fees from the high street lenders.  But new borrowers struggle to get a loan above 75% LTV!

Wouldn’t borrowers rather have choice, even if this comes with a different approach to arrears management, than no choice at all?  

The Treasury Select Committee’s criticism goes beyond arrears.  The Committee is concerned about low LTV lending, which we agree is holding the market, and opportunity, back.  But with the FSA requiring several times as much capital for above 75% LTV lending as below, shouldn’t the criticism be directed at the regulator (another Government department) rather than the lenders themselves?

If we were to return to the situation where capital allocation evened out based on the portfolio then I am sure there would be high LTV lending available from lenders.   As it stands at present, the rates that would need to be charged on high LTV lending are so onerous to cover the capital requirement that it is no surprise that the vast, vast majority of the £145bn which will be advanced this year is targeted at lower LTVs.

The Treasury Select Committee also addressed arrears charges.  But, as the CML points out in its response, if lenders did not charge for arrears management, then these costs would be averaged out across the entire mortgage book, to be met in large part by those who were not in arrears.  How fair is that?

We think that the Treasury Select Committee does a great job in holding industries and individuals to account.  Most of their work is very good indeed.  In the area of mortgage lending, however, we think that they should support competition, even if the diversity requires different lending terms.

After all, in a highly competitive world, borrowers always have choice, and do not need to accept the terms first offered to them.  Contrast that with today’s bland environment where borrowers have virtually no choice at all