A man for all seasons

The last time I had lunch with Phil Jenks was nearly three years ago. It was at Langhams in Piccadilly, where men of a certain age can appear trendy and still enjoy sausages and mash and other comfort food by the bucketful, and sit from noon to midnight so long as they keep quaffing the Bordeaux and brandy.

At that time the market was bullish and Langhams offered a happy cacophony of clattering plates and a rising sea of voices. In such an atmosphere conversation tends to grow louder by the glassful and in that respect we were as guilty as our fellow diners.

Jenks was then head of specialist lending or something like that, and the intermediary brands of HBOS were doing quite well thank you, while at Centaur we were just about to launch Lending Strategy on a wave of goodwill and a generous freelance budget.

In short it was the best of times, and it was good to reflect on how far we had come and how much the mortgage business had improved since Jenks, a law graduate, joined Halifax at branch level in 1972.

Back then you had to save with a building society for several years for a big deposit before you were granted a mortgage, there were just two types of mortgage available and the economy was going to the dogs. The following year there was a miners’ strike, the three-day week and escalating fuel prices, and by 1974 Harold Wilson’s government had to lend the building societies a huge wedge of money to keep the lid on house prices and save the housing market.

Three years on from that lunch at Langhams, we are sitting in Bentleys Oyster Bar and Grill which is round the corner from the former offices of the Building Societies Association in Savile Row.

Apart from the quality of the food which is excellent, I suggest we might be back in the 1970s.

Jenks laughs. There’s hardly anybody else in the restaurant – another sign of the times perhaps – but he’s relaxed.

His retirement, he assures me, has nothing to do with the Lloyds TSB/HBOS thing. His decision to go had been made long before that and at 50-something, he had been prompted by a desire to slow down and enjoy more quality time.

“Business meetings late into the night and that kind of thing lose their allure after a time,” he says with a grin.

As for the rumour that he’s been offered a lucrative contract by Standard Bank to go to South Africa, his eyes twinkle. “Well, I’m going to South Africa,” he concedes, “but that’s for the World Cup.” That’s a pleasure to come, but what does he think of our current state of purgatory? How does the present credit crunch relate to recessions past?

He smiles but is not reassuring.

“I think this one’s the worst simply because it has not been driven by customer credit issues,” he says. “In 1974 and the late 1980s the levels of inflation and unemployment were major problems. Frankly, as a mortgage lender it was easier to manage and find solutions as confidence did not play such a big part.

“This time so much is down to sentiment, and it’s happened so quickly. I mean, if you look at the fall in house prices and housing transactions in the past 18 months the change has been far more rapid than we saw in the previous two cycles – and that’s why it has been so difficult to manage.

“Although we did see significant falls in the late 1980s this was spread over four-years, whereas this time we are seeing it happen over 12 months.”

Jenks is gently disarming even when he is being critical so I am halfway through the first course before it sinks in that he’s having a mea culpa moment when it comes to who is to blame for the sad state we are in.

“It’s a pity really,” he says, “but retrospectively the market started to correct itself in 2003 but this was followed by a surge of activity in 2004/05 with more new lenders, more activity and I guess some slightly riskier lending. That’s probably the worst thing we did because the severity of the correction now is in part a result of that.”

We agree that the low interest rates that were introduced as a reaction to the events of 9/11 helped to create a potent mix that fuelled what turned out to be an unsustainable recovery but Jenks, in the nicest possible way, is still in something of a soul-searching mood.

“I think you also have to say to yourself that when rates started to rise, in an attempt to correct the situation we as an industry adjusted some criteria to compensate. Maybe at that stage it would have been better to have stood back and let the correction take place.”

But, I ask, was that driven by greed or just competition in the market? (I like to think the best of my readers.)

“That’s interesting,” he says, and I sense that in an ever-so-subtle way he is going to widen the blame or at least suggest, by implication, that the situation is more complicated than most of us think.

“If I think back to 1995 and the Halifax merger with Leeds followed by demutalisation, most of that was about how to grow a business while dealing with the question – how do you satisfy growing demand for housing?

“And then we had the Tories getting rid of council houses,” he reminds me. “We had to pick up the funding for that. “So in essence you see the government stepping back from funding housing and the banks taking its place and growing their funding,” he says, adding enigmatically, “So for me, the challenge seems to be – where do you draw the line?”

It’s an interesting gambit. There’s nothing new about successive governments driving the growth of home ownership and the idea that this led to banks and building societies lending to people at the margin, but I had never thought of the roots of our current problems being in part attributable to a funding dilemma brought about by Right-to-Buy.

So irresponsible lending, as politicians like to label lending to people at the bottom end of the housing market, is really a bi-product of their very own housing policies?

Jenks is smiling again but he doesn’t labour the point.

“Vince Cable is an interesting character and he often uses the term injudicious lending,” he observes, by way of an answer. “I would say that looking at today’s debt picture, 98% of our customers pay their mortgages. That doesn’t smack of an injudicious industry.”

Sound bites, he believes, are corrosive.

“That’s an example of where the language we use is quite dangerous,” he says. “At the edge – and it was really at the edge – some lending was marginal but it’s really a question of knowing where to draw the line.”

Inevitably we return to the funding issue. There’s a tendency to think that the growth of securitisation was driven solely by greed but it’s also possible to argue that it liberated the market and helped people get on the housing ladder who at other times might never have become home owners. What is not clear is what other alternative would have funded the growing demand for homes.

The problem here, I suggest to Jenks, who I know has been providing information to Sir James Crosby in his Treasury review of mortgage funding, is that as a result of the credit crunch, securitisation has all but dried up and rather than finding a way around the problem Bank of England governor Mervyn King has in fact advocated a return to deposit-based funding.

Jenks does nothing to disabuse me of my opinion that the Crosby report is now an irrelevance.

“But retail savings could not fund the UK housing market,” he adds. “That was part of the problem. In essence, once the government stepped back and decided we didn’t need a social housing sector – whether you believe that’s right or not – it happened in the early 1990s and the banks filled the void.”

He’s uncertain if that was a step too far.

“I think it will be difficult to unravel that situation,” he says, but then adds another teaser.

“Property used to be something we subsidised via MIRAS,” he says. “We had tax relief so there was an advantage in owning your own home. Now property is a taxation source. Look at stamp duty and inheritance tax and there’s now much more taking by the state than giving back to property.”

In the nature of table talk we return to the issue of wholesale funding and the point he had raised about Cable, the rent-a-quote man.

“The interesting thing about the debate on banks lending to banks is that one of our biggest investors is an American pension fund, so it’s not just banks,” he says. “Until the government decision on Granite, investors could be confident of the performance of big UK securitisations. However, all the doom and gloom in the housing market has created a self-fulfilling prophecy and investors now see the same problems in the UK as in the US.

“Because they’ve been stung in the US it’s difficult for them to explain to their boards why the UK is different and the more we sound and behave like the US, the more difficult it is to see this market coming back.

“So I think freeing up the banks is one thing but it’s not just the banks but also the residential mortgage-backed securities investors we should be addressing,” he adds. “We’ve painfully failed to persuade the US that we’re different if only because in most instances – ourselves being a prime example – we held on to risk. We never passed it on.”

It’s hard not to agree. Besides, I suggest, wasn’t optimising your balance sheet using securitisation once regarded as the sexy thing to do by City analysts?

That appears to press the irony button.

“If you go back to traditional City thinking about HBOS it was deemed that growing market share was important even though it wasn’t that much of a barometer of profit,” he says. “We also needed to diversify our assets geographically and into different classes, and in doing that to some degree you get a balance sheet that’s structured with more assets than what are known as retail liabilities. In a way, that’s what has come back to haunt us.”

I’m unhappy with the idea of Jenks being haunted by anything, especially during our lunch which despite – or maybe because of – all the gloom and doom has been quite fun. So I try to end on a happy note and turn back to politics and his work on vacant homes, social housing and the affordable housing initiatives the government has dabbled in. I ask – how difficult is it to be candid with politicians and is there an optimum solution to our housing problems?

“It’s easy to make tactical decisions and government is always open to guidance but we don’t have a clear housing framework and therefore decisions are made without thinking about the longer term consequences,” he observes. “Tax relief and Right-to-Buy are good examples of that,

“You know, even things like student fees whereby first-time buyers leave university with debt have a knock-on impact on housing, so at some point I think someone has to take a more holistic view.

“We need to define a framework for housing and I don’t think we can leave it to the market any longer,” he adds.

“Naively, when I was young I used to believe in market solutions. Now I think we have to work out how strong a social rental sector we need and how we fund it, and then how big a private rental sector is appropriate bearing in mind the changing nature of our population.

“Alongside that, we must decide what home ownership should look like – are high LTVs responsible or desirable? Then we’ve got to allow for the transition between renting and owning and back again to be achieved more easily. We need a roadmap.

“Why do we recycle problems? There is a danger here because the supply and demand problems facing the country could make the peaks and troughs in the market sharper.”

That, I suspect, will not be Gordon Brown’s problem, and this won’t be the LSlast of Jenks either.