The continued growth in house prices is good news as it shows confidence has not only returned but remains in the housing market (7 months of steadily rising prices can surely no longer be described as an aberration). However reading some of the commentaries that have accompanied the latest January figures I am left with the impression that some people are almost dis-appointed by this news as it doesn’t seem to fit with their views. I would go so far to say that there seems to be almost an attempt to talk them down.

 

Are we over-reacting here? Well there is always that possibility but just as the rise in house prices should not be seen as a surprise when looking rationally at the right data, the factors that we would look at going forward are, on the whole, more positive than negative.

 

 

 

The market in context

 

Prices began to stabilise and rise towards the middle of 2009, having fallen for the 19 previous months. Having fallen circa 23% peak to trough, prices stabilised simply because property became very affordable again through a combination of lower prices and lower interest rates. This price stability/rise occurred despite the fact that we were in the teeth of a major recession, despite the fact that mortgage finance was in short supply especially for higher LTVs, and despite unemployment fears.

 

If we now wind the clock forward 8 months to the present, all of the negative factors listed above have arguably improved. Growth is now positive (albeit by 0.1%!), mortgage finance although still in short supply has improved and unemployment has not and does not appear to be reaching the heights feared. In short things are better! We are not by any means suggesting we are out of the woods and indeed our view is that the recovery from this recession is going to be a long, slow, bumpy road. However we are on the upward slope of a recovery.

 

There is of course a risk of a ‘W’ shaped recession, however this is a matter of debate and conjecture and until any evidence to the contrary emerges, we are of the opinion that this remains a ‘V’ or perhaps an ‘L’ shaped recession (indeed most the commentators in their HPI views do not allude to this as a factor).

 

 

2010 onwards

 

So, if things are looking more rosy, why are so many views pessimistic? Well there is the obvious human trait of erring on the side of caution and reflecting the general economic situation. However the main rationale seems to be supply related and the argument goes that once more property comes onto the market prices will flatten or fall.  

 

As well as not fully subscribing to the view that price stability was driven simply by/largely by supply, we do not believe that reference back to property supply figures pre 2007 bears the significance it once did. Firstly property supply is driven by people’s desire to move, which is driven in a large part by available finance. Remove the supply of easy, ‘cheap’ (in relative terms) money and some of the aspirational buying and selling disappears. Secondly, the recession of the last 2 years has seen new house building decimated. From 250,000 new homes a year to under 75,000 has meant that the last 2 years has seen a shortfall of over 300,000 new homes being built. (Note: Before anyone suggests that this has been countered by all the EU immigrants returning home, no it hasn’t! They also have  major, arguably worse, recessions in the likes of Lithuania and Poland) .

 

Short term we believe that, short of a ‘double dip’ recession, the only event likely to cause significant price falls would be sharply rising interest rates and if you are, like us, of the view that the recovery is going to be low and slow, there is going to be little pressure here for some considerable time.

 

 

Long term

 

Having got it wrong so many times, getting firms to predict prices over coming years is very difficult. However, one firm that is prepared to commit is Savills research. We have followed their research for a number of years and always found it informative as well as generally quite accurate. Their latest views can be found here .

 

Whilst we may be in for a bumpy ride for the next year or two, the long term outlook for house prices is and remains positive.   

 

Stephen Knight, Chief Executive

 

As we have not posted a blog since 25 November 2009 I would like to take this belated opportunity to wish everybody a Happy New Year.  Let’s hope that major positive changes occur in our market during the course of 2010.

 

We are working very hard to bring this about.  Our investors are known for taking the long term view and are being very supportive, working with us to find a solution that can bring Checkmate to market.   We are not there yet, but we are closer than we were.

 

Unfortunately, however, rumours of an imminent launch in the next few months are wide of the mark.

 

What continues to encourage us is the strength of demand we have received through our ongoing conversations with the intermediary market.   The half a dozen lenders that are currently accounting for at least 85% of UK mortgage lending are hurting the intermediary sector by operating dual pricing in favour of direct business, and often taking a long time to give a decision.

 

By contrast, our plans are still to focus on supporting the intermediary sector and to use our substantial investment in the market’s latest and best decisioning system to make a speedy credit decision whilst embracing all aspects of lending responsibly.

 

The immediacy and certainty of our approach will offer an important value-added service to assist intermediaries in selecting the right balance of product and service, and provide consumers with a genuine alternative to the current lenders.

 

When we have something definite to announce, we will do so.   Rest assured that we are still here and working very hard towards the possibility of a launch in 2010.

 

 

Whilst the focus of most UK commentators seems to be firmly on the recovery in UK property prices, a far more important trend (from a global perspective) has been occurring in the US. Having fallen for three years, US prices have risen now for 5 consecutive months, rising by 0.8% in the month of September in the latest figures published today.

The relevance of US house prices may not be immediately apparent but it is very important for three primary reasons:-

1. There is over $14 Trillion of US mortgage debt outstanding  of which nearly $9 trillion is financed through the financial markets through securitisation. With falling prices the confidence of both investors and issuers is undermined, as the value of the underlying assets is decreasing

2. The US economy is the largest in the world. Like the UK, most people’s wealth is tied up in property. Rising property prices create greater confidence that expands across the economy and helps to increase general consumer spending

3. Despite all evidence to the contrary,  there are still a large number of bankers who seem to believe that US and UK property prices are correlated. So, rising US prices combined with rising UK prices will increase confidence in the UK property market.

We now appear to be very firmly past the bottom. The question remains however as to how long and strong these trends will be

Stephen Knight, CEO

Yesterday, the FSA published its long-awaited review into the mortgage market.  There is too little space here to analyse the paper in full.  But set out below are what we believe to be the 12 main points affecting our market, and yours, with our commentary alongside. 

 

1. Lenders will be required to hold more capital and liquidity. Inevitable following the recent crisis, but the result will be less and more expensive funds available in the mortgage market.

 

2. No ban on high LTV mortgages, but reminding us that such a ban exists in Austria, Poland, China and Hong Kong.  Not sure where the comparisons are taking us, but good news nonetheless.

 

3. No limit on loan-to-income, but more verification of income and expenditure.  The current proposal requires the lender to assess “the level of a consumer’s expenditure in determining the affordability of a mortgage product.” As it stands this will create an onerous and judgemental approach to decisioning – future applications will take longer, be more prone to individual opinion, and more open to dispute and arbitrary rejection.

 

4. Self cert is dead.   We will not be offering self cert, but this regulatory shift is a concern for those borrowers who are paying their existing self cert mortgages, and now find themselves stranded on their current product.   The removal of self cert creates a regulatory barrier for these borrowers – more thought is needed to help these current borrowers.

 

5. Regulation extended to all secured loans including second charges and buy to let.  Expected.

 

6. No more “layered risk” where one or more of the following components may not be present in a mortgage advance, i.e. high LTV; no income verification; credit-impaired borrower and lending to debt consolidation.   We believe the FSA is right to take this stance.

 

7. Arrears charges banned where borrowers have entered into an arrangement to pay back arrears by regular contribution.  This is in line with our views – where borrowers are paying back arrears and working with lenders, the costs of managing this arrangement are minimal. This aligns the FSA position with the current FOS views on arrears fees.

 

8. Interest only loans to be underwritten as if they were capital and interest.  This reiterates current rules under MCOB that require lenders to “take account of the cost of any associated repayment vehicle and, if no such repayment vehicle is specified, ‘may’ base their calculations on an equivalent repayment mortgage”.  As such, it is in line with our and most lenders’ current approach.

 

9. Limits on equity withdrawal.  We cannot see the justification for this which will negatively impact borrowers’ choice, flexibility and resultant spending in the economy. 

 

10. Regulated intermediaries will be directly responsible to the FSA for distribution and advice.  We support this stance in principle.  However, it will certainly increase the resource that the FSA needs to manage the intermediary market, and there’s a risk that this will in practice lead to spreading efforts too thinly.

 

11. New rules will be targeted at the “non-banks”, including the possibility of regulating purchasers of mortgage portfolios as if they were the first lender of record.  Too early to say how this could work.  The current, tragic shortfall between equilibrium supply and demand, and current mortgage availability, can only be made up by the international capital markets, so any mechanism that slows that down is bound to impact borrowers’ choice and the availability of mortgage finance.

 

12. Abolition of capitalised arrangement fees.   It will suit some borrowers to capitalise a higher fee and pay less on the monthly payment.  Regulation down at this level of detail could be market-harmful. 

 

Remember, this is a discussion paper so, if you have views that you want the FSA to take into account, you will need to answer the questions they have posed by January 2010.  Although, in response to the feedback, the FSA may consider withdrawing or amending some of the above new requirements, I would plan your life on expecting most of it to be introduced in the second half of 2010, except for the regulation of second charges and BTL – this will take longer as it changes the FSA’s remit and requires parliamentary approval.

 

 

 

 

By Peter Stimson - Commercial Director

I came across an interesting fact the other day. Since 1998 global temperatures haven’t risen. I am not of course suggesting that global warming isn’t a fact or won’t occur, simply that data from the last 10 years does not appear to support the hypothesis. How is this relevant to house prices? Well, despite the fact that house prices are clearly stabilising and in some areas rising, there seems to be a growing body of experts who seem to think that prices in 2010 are set to fall further despite there being little apparent supportive evidence.

Are house prices set to decline further in 2010?

Whilst prices, having falling by circa 23% (peak to trough) now appear to be levelling or increasing, some take the view that the stabilisation is only temporary before another round of price falls occur, in 2010. I was reminded of this last week whilst reading the Fitch view on the housing market. What is particularly frustrating is that the authors of these type of reports rely overtly on pure economics. Housing and house prices, as we have covered in several blogs on our website, isn’t an exact science and treating it as such may not get you to the right answer.

To quote Fitch Ratings. “A 30% fall from the peak of October 2007 would bring this ratio (house price to income) back in line with the long term average. In comparison, the house price declines in the recession of the early 1990s saw the average house price to income ratio fall below the long term trend.” Unfortunately whilst this may be correct in pure economic terms, this theory falls over as soon as you bring interest rates and supply into the equation. As we have also covered in our some of our blogs  the current crisis has seen the breakdown between several factors that may previously have held a relationship.

Our view is that If you want to gain a real understanding of what is going to happen to house prices in the next 12 months or so, the best way to do this is to first understand why prices now appear to have stabilised (or in the south risen) and then look at the outlook for these factors over the next 12/24 months.

So, why have prices recovered?

• Prices fell over 20% peak to trough – By any logic, price falls cannot be indefinite and a point is ultimately arrived at where buyers and sellers reach equilibrium. Our long held view has always been that it was likely to be Q3 2009 given that overall affordability at this time would be at a generational low. As the graph below, which looks at affordability and house prices through time, shows, the historic low point and longer term average between affordability and house prices occurred again in Q3 this year. A co-incidence?

 

• Supply, is constrained This isn’t simply an issue of people holding off buying or choosing to stay put, it is also a long term demand/supply imbalance which has only been exacerbated over the last 18 months as new building has dramatically fallen.

-  Interest rates are low and are likely to remain so.  Whilst the strong relationship between Bank Base Rate (BBR) and actual consumer interest rates (both deposit and lending rates) has broken down, it is easy to forget that new mortgages are still available (albeit to a smaller section of the market) at rates which are amongst the lowest for decades. Additionally, many existing borrowers are finding that the products they took out in the past revert to BBR plus a small margin. In short borrowing is for most people very affordable.

If we accept the above as the primary reasons why house prices have stabilised, for prices to again fall, it is logical that one or more of these factors has to change or another factor has to enter the equation to negatively influence prices. 

The outlook for 2010 and beyond

Of those who believe that house prices are set to fall further again next year, three principal arguments seem to prevail.

• Firstly, as more property comes onto the market the demand/supply imbalance will resolve itself making the property market much ‘softer’ causing prices to fall.o If, as I have seen, the argument is that rising prices will encourage more people to sell/move, I have yet to see any real evidence of this. Additionally the forbearance that lenders are showing to those in arrears means that there is not a ‘wave’ of repossessions or forced sellers hitting the market, more a steady ongoing supply. With interest rates so low, most people can ‘sit it out’. In short we do not see a rapid adjustment to the supply situation occurring at the pace needed to cause prices to decline.

• Secondly, as unemployment rises throughout 2010, peaking in 2011, the argument goes that this will deter many from entering the market and create more forced sellers.
o Unemployment and the general confidence issue it creates in the market, undeniably have an influence on property prices . However I would argue that the fear factor is here already as we are over a year into a major recession. Unemployment numbers may continue to rise for the next two years, impacting individual borrowers, but the forbearance shown by lenders and the relative impact this additional group could have on the market overall is limited.

• Thirdly and most significantly, is the impact on the housing market when interest rates start to rise. With BBR at just 0.50% and unlikely to fall further, the biggest worry is that when rates rise (as they inevitably will do), affordability decreases and prices fall. The important piece here though is around timing.

The future for interest rates

When rates were cut to 0.50% in March this year, there was still a large degree of uncertainty around the length, depth and severity of the recession. More than six months further on, a clearer more generally agreed view is emerging of likely future events. Whilst we now may be at or indeed even past the bottom of the recession, recovery is likely to be long and slow and complicated by the large and growing government deficit. This means that there is little upward pressure on rates in the short to medium term and we believe rates may stay low for several years to come. This is being reflected in swap rates which, from rising in the spring, have been consistently falling over the last few weeks reflecting the general concerns over the recovery timeframe.

 

This doesn’t of course mean that we are entering a Japan style ‘lost decade’ period, simply that with interest rates likely to remain low, the factors that could push house prices lower in 2010 don’t to us appear to be there. Time will of course tell who is right!

By Stephen Knight, CEO

The Lloyds HBOS Permanent (Perma) deal marks a turning point in the UK RMBS market.  Don’t believe the commentators that say it isn’t, because many of them were still predicting as recently as last month a freeze in the securitisation market until 2011. 

 

The Perma deal was 2x over-subscribed, and upsized as a result, with secondary pricing settling lower than the initial pricing by around 50bps.  This is exactly what you want for an RMBS issue and it is an indication of strong underlying investor demand. Not only was the deal over-subscribed, we understand that there were also over 50 different investors from 15 countries buying the paper.

 

I have seen comments along the lines that the pricing is too expensive. Well, it might look expensive against the crazy prices that marked the unsustainable market pre Northern Rock.  But the cost of issuing the deal actually looks good when compared to: firstly, the mortgage rates which are currently being charged to new borrowers, and which all borrowers (and the market) will have to get used to under the new liquidity and capital regimes being imposed by the FSA and, secondly, against the alternative cost of other liquidity instruments, notably the cost of raising senior unsecured debt from the markets.

 

The most significant aspect of the Perma deal which received negative commentary, was the “put” option.  This enables investors to require the issuer to take back the residue of loans outstanding at the end of five years, which has in turn meant that the assets cannot be removed from the issuer’s balance sheet.  Some commentators have said that this structure means that the Perma deal is a one-off and not indicative of the return of the RMBS market.

 

However, we do not see it like this. To encourage investors to return to the market you are initially going to have to deal with some of their concerns. As the first deal of note for well over a year, to expect a structure mirroring pre-2008 is unrealistic. As new deals emerge, based on new originations, we do not think that the “put” options needs to feature. 

 

Is the securitisation market now open again?

 

The answer is that it is now starting to re-open, with clear demand from investors for new paper structured in the right way.  Given that the majority of the Lloyd’s HBOS mortgages were historic back book loans with a relatively low spread, this looks very positive for newly originated non legacy assets, paying a sustainable rate of interest that reflects current mortgage margins. When these loans are securitised, it will start releasing important new funding to a market that is tragically under-supplied. 

 

The damage being caused to borrowers and the economy by the current woeful level of new mortgage lending needs to be urgently addressed.  The deposit-taking lenders are doing their best, but only six organisations are achieving 85% of all lending and they are snowed under.  Only the international capital markets will make up the shortfall that the UK mortgage market needs, and this will come through securitisation where, according to the rumours I’ve heard, there are several further deals in the pipeline.    

 

 

 

by Stephen Knight, Executive Chairman

 

Last week’s press featured two mortgage themes: previous fraudulent over-valuation by valuers causing lenders substantial losses, and current under-valuation by valuers causing economic detriment by reducing mortgage availability.

 

The handful of you who have read my books know that I favour AVMs, for objective risk management reasons. I’ve never met a computer system that tried to defraud me, give me a subjective opinion, or form relationships with local brokers. The best AVM gives honest + or - confidence percentages, will say when it can’t return a value and is updating its factual database every minute of the day. Indeed, by the time you finish reading this blog, it will have more accurate valuation data than it had when you started.

 

I acknowledge, of course, that there is a powerful body of opinion to the contrary, which must be listened to. Checkmate is not in a position to buck that trend. The extent to which we will deploy AVMs when we launch will be in consultation with our funders, some of whom may require 100% manual valuations. We will also comply at all times with the direction of our regulator as to how and when AVMs can be used.

 

I think that the best AVM on the market is from RightMove. If an estate agent wants to include its properties for sale on this the UK’s largest website, it must include all of them. Thus, RightMove has in its database over 90% of UK properties including, in an increasing number of instances, pictures, rental comparisons (for Buy to Let) and recent condition reports. The irony is that this is the database that is often used by valuers to get comparables for their manual reports.

 

For those who are very risk averse-which includes Checkmate-a second, contrasting AVM might be of comfort nonetheless. Calnea tracks Land Registry actuals, an incontrovertibly accurate and factual database. Our AVMs will use both RightMove and Calnea in a unique combination. We blend the values and confidence levels returned by the two arm’s length AVMs, which will not only produce a better and more reliable value, but which will also prevent applicants discovering by their own enquiries what valuation we will use to assess their applications.

 

Lending policy rules will inevitably require manual valuations either before or after the AVM where we and our funders cannot be sure of the equity cover in the property for a variety of reasons. Where the AVM is successful, however, the benefits, in my personal opinion at least, will be no human-inspired over and under valuations and a speedy instant service to mortgage applicants. And we all know how applicants, their advisers, and the market are suffering due to current service levels.

 

This is not a new theme for me. In my first book (’The Art of Marketing Mortgages’, Collins & Brown 1997) AVMs did not exist, but I said in the section on ‘The Future’:

 

“Some of the more forward-thinking lenders are also looking at the possible demise of the house valuation. The application of a property index….could well replace the …mortgage valuation”.

 

Despite teething problems with some AVMs, which I accept have caused some issues, I haven’t changed my mind about this even though, as I say, Checkmate will comply at all times with the wishes of our funders and regulator.

 

As I checked the book for the above quote I found another, related to the same issue. I said in 1997:

 

“If all the valuation fees paid by borrowers were, instead, provisioned against losses directly caused by the property valuation not being what the lender expected, there would be massive profits for both lenders and borrowers.”

 

So I decided to update my maths.  Mortgage losses sustained by lenders last year were a record high-more than the amount of the previous two years added together. In fact the BoE reports a massive £736 million of losses over the three years 06-08 inclusive. If my theory is to stand up twelve years later, it will have to against the backcloth of unprecedentedly high losses.

 

Assuming a 75% application-to-completion ratio, and an average application fee of £250, the application fee income generated by lenders from mortgage applications in 06-08 would have been about £3 billion. In other words, even if every £ lost in the BoE figures was directly attributable to the original valuation (which it wasn’t) , the application fee income was still 4 times higher than the losses.

 

These figures simply give scale, because lenders could not dispense with valuations altogether or they would be selected against. But if every lender paid for a double AVM, the application fee-to-loss coverage would be still be more than three and a half times the losses. In fact, losses could double by ditching most manual valuations - and why would they? - and lenders would still be better provisioned by using the application fee income.

 

 

 

There is common agreement that the likely gross lending figure this year of circa £145bn is insufficient to allow the housing market to function effectively. With only those people with a large deposit, strong income and squeaky clean credit having any realistic chance of obtaining a mortgage at present, clearly a ‘normal’ functioning market would be significantly larger. The question though that I have yet to see anyone attempt to answer is “what size should or would the market need to be in order to function effectively?”

 

 

What is ‘normal’?

 

To start to answer the question we need a definition of what ‘a normal, functioning market’ actually looks like. As much as the £145bn market now isn’t ‘normal’, clearly the peak of the market of £365bn in 2007 could also be described as ‘not normal’, particularly in hindsight. To try and arrive at an answer we have defined ‘functioning’ as a market in which anyone who has reasonable credit, sufficient income and a deposit of at least 5% to put down, can obtain a mortgage at a ‘reasonable’ rate (i.e. not the sort of rates on offer now at 85%LTV and above!).

 

In effect ‘normally functioning’ is where the mass of the general population can obtain finance providing they can demonstrate the means, ability and willingness to repay and can share in some of the risk by putting a deposit down. This obviously excludes some of the more marginal areas that helped create the large market in 2007, such as sub-prime and 100%+ loans

 

Now comes the maths. If we start by looking at the peak of the market and subtract accordingly, we can get to a view as to where the market needs to be both now and in the medium term. In the figures below I have been aggressive in my assumptions so that the ultimate figure we arrive at is a minimum functional market size.

 

·         Buy to Let (BTL) – This was £44bn at the peak. Given price falls, we are estimating that the demand in this sector of the market has halved as many small landlords and speculators will steer clear  

·         Self-cert – This was running at a similar level to BTL lending at the peak. This sector has now effectively closed but we are assuming that half the borrowers here could substantiate their income if they were required to and could therefore qualify for a mainstream loan

·         Remortgages at the peak accounted for approx 36% of gross lending, or circa £131Bn. Given negative equity and a number of customers who are opting to stay on lenders SVRs we can safely assume that this number has at least halved. Deducting for BTL and self-cert remortgages (to avoid double counting), this means remortgaging would fall by circa £56.9bn

·         Sub-prime – This represented approx 8% of gross lending at the market peak. However as around 70% of the activity here was refinancing, losing this sector from the market means a reduction (after accounting already for the remortgage drop off) of approx £9bn

 

Deducting the above numbers from the 2007 peak brings the total down by approx £110Bn to £255Bn. Then, assuming an average 21% price decline (HBOS UK index, peak to trough)  translates into a direct reduction in lending, this means that an effective market size that satisfies most current demand would be a minimum of £200bn. I would clearly emphasise the word current in this estimate – going forward a year, this size will be inadequate…

 

 

Remortgaging remains the unknown quantity

 

Whilst this number is significantly below the market peak, we need to bear in mind that this number is likely to be artificially and temporarily low given what has happened to interest rates. Low SVRs, often linked to Bank Base Rate (BBR) has meant that many customers in the last 12 months who have come off a fixed rate, are better off staying on SVR rather than re-financing. The big unknown though is what happens not if, (but rather when) rates start to rise? We have now tens of Billions of mortgages on variable rates where customers have previously opted for the security of fixed rates. Even if fixed rates are not as an attractive option as rates start to climb, many customers will want security. As rates rise we would anticipate a remortgage surge adding at least £25Bn onto the gross lending figures.

 

 

Sub-prime and High LTV lending (100%+)

 

How and if and sub-prime lending returns is a matter for debate. However what is clear is that in certain areas of the country (as highlighted in a Fitch report in 2008) over 10% of mortgages granted in 2006 and 2007 were for customers with some form of impaired credit. Without sufficient finance here, there is a real risk that customers become ‘stuck’ long term, preventing parts of the housing market from functioning. The absence of high LTV lending (which we do not envisage returning for the foreseeable future) simply exacerbates the negative issue for borrowers who took out these products. Even if you don’t regard these lending areas as ‘normal’, their absence will impact the market’s recovery.

 

 

Implications

 

If we have a required funding shortfall currently of at least £55bn, rising in all likelihood to £80bn+ in the next 12 months (this is all without any house price rises assumed), the question remains unanswered as to not only who is going to lend this additional sum, but how is it going to be processed?

 

 

 

 

 

 

 

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

 

One of the biggest issues that still seems to be prevalent in much of the reporting we see is the tendency to draw comparisons with the past and from this to try and extrapolate the future. Whilst it is a natural human trait to look to past experiences to try and determine outcomes, the word that continues to best describe the events of the last 24 months continues to be ‘unprecedented’.     We have tried over the last few months to try and de-bunk some of the inaccuracies that have arisen as a result of trying to draw comparisons with the past. To date we have looked in depth at two areas, the housing recession of the 1990s  and the comparisons that have been drawn between the US/UK housing markets.  However in the last few weeks we have noticed two new areas of ‘look back and compare’ which we again believe could be mis-leading   Addressing the new inaccuracies  The stabilisation of the housing market (which is now being consistently reported by most indices) seems to have taken some commentators and analysts by surprise. Having spent several months talking down or even dismissing the improving figures as largely aberrations, often principally on the basis that with transactions levels ‘so low’ and mortgage finance constrained, the view in some quarters was that price stability could not yet be attained. Now that the evidence is too strong to be ignored, the latest mantra that seems to be emerging to explain the current stabilisation of prices is that of a short term or temporary housing supply issue that, once it corrects and more supply comes onto the market, prices will continue to fall.  Let’s take each of these points in turn:-   Transaction levels;- There is no denying that a lack of available mortgage finance, particularly at higher LTVs and for more specialist sectors (be that large loans, non-conforming or Buy to Let) is having a significant impact on consumers’ ability to obtain loans and was a significant factor behind property price falls. However simply referencing past transaction levels doesn’t on its own tell you much other that the obvious (see graph below). As well as there being other factors at play here, such as negative equity limiting transactions and a lack of stock in the market, the main reason for the low transaction levels are unprecedented i.e. This is the first time (outside of war) where there has been a liquidity freeze. There is therefore no historical data to show the relationship between transaction levels (partly enforced) and prices. Lack of available finance has driven prices down but taking  low transaction figures on its own, ignoring housing supply issues and ignoring the fact that property is now the cheapest it has been in real terms since 1997 really doesn’t tell you where the bottom is. Even without a strong recovery in available finance a bottom will be logically reached at some point as markets adjust to the new reality.        Supply: Whilst estate agents are reporting low level of stock (RICS reports that June stocks were 32% lower than a year ago) the supply issue is nothing new. Why supply therefore has become the new rationale for price stability is therefore something of a mystery to us. The supply issue has always been there. Making this now the central point of an argument as to why prices have/are stabilising suggests that the influence this has on prices may have been under-played in the past (something we believe) Under-supply in London and the South East has been a problem for many years and is getting worse exacerbated by a rising population, falling household size and a lack of new build.  In addition, we are hearing lots of anecdotal stories of Home Information Packs (HIPS) deterring some of the ‘unsure’ sellers from marketing their property (particularly the type defined as “I might sell if I can get the right price”).  Supply in our view is and will continue to be an ongoing issue, particularly in parts of London and the South East. Negative equity is certainly behind some of the low stock numbers but other factors also come into play and low stock may be a rather longer term self-perpetuating issue in that people won’t sell if they can’t see anything they want to buy. Although we subscribe to the view that a longer term sustainable rise in prices can’t occur without big improvements in mortgage finance, the current stock situation does mean that many experts central tenet that prices can’t rise until transaction levels improve dramatically is proving to be incorrect.    House prices going forward   Time will tell as to whether our view that the current price stabilisation is a permanent rather than temporary feature of the UK housing market is correct.  In economic terms we are certainly not out of the woods yet with rising unemployment set to be a feature for at least the next year.  However trying to quantify the impact of such factors such as unemployment and consumer confidence is in our view more of an art than a science. Looking back historically at such factors doesn’t really help as it is very difficult to view history out of context. The only fundamentals we believe that it is possible to use with any accuracy in a historical context are affordability (interest rates and wages), supply and price. Looking at these three factors tells you quite simply that housing is the currently the most affordable it has been for a generation.