Now that I’ve joined the broker community with Countrywide, I have been asked to use my experience in the lending market to give brokers an insight into how lenders appear to be responding to current market conditions.
In my new series of monthly commentaries I will try to highlight the key factors that might be driving lending strategies, product ranges and aspirations. Please give me feedback on how I’m doing and what you want covered in the coming months.
We’re all enduring unprecedented market conditions but it is as important as ever for brokers to understand the considerable lending supply side issues.
December’s gross lending came in at £11bn, giving a 2010 outturn at £135bn. This means that total lending has fallen some 63% over the past three years.
This issue is compounded by house transaction volumes. House sales in a normal market have always exceeded one million, with 1.2 million being a long-term average.
Yet for the third year running 2010 will outturn less than half of ’normal’ with somewhere in the region of 575,000 house sales.
The sad truth is key factors affecting lending volume decisions aren’t likely to change any time soon
I was encouraged that this is finally being recognised as a political issue – Prime Minister David Cameron’s comments that the housing market is stuck are true – and we need to pull together to get things moving again. Cameron’s comments may well have led to an emergency meeting this month to find a solution while a series of critical talks are said to be under way involving several government departments.
I’m sure everyone has their own view as to what the ideal solution would look like. In my opinion, gross and net lending targets would play a huge role, among other government incentives, to stimulate first-time buyers, home owners and landlords to get the market moving again.
That said we do not live in ideal market conditions so I suspect many will be divided on what an ideal solution might be.
Lenders are in a difficult position, they have to rebuild their balance sheet – and that means restricting lending supply – but still lend sufficient volumes, particularly in the housing and SME sectors to keep the country moving forward.
But with the banks issuing more shares, I feel this is now more of a liquidity issue than strictly capital.
The banks are moving short-term funding to medium term and looking to replace the Special Liquidity Scheme. The sheer amount that needs refinancing means money for additional mortgage lending looks difficult.
The sad truth is that the key factors affecting lending volume decisions aren’t likely to change any time soon.
Whether it’s external influencing factors such as Libor, market trading conditions and liquidity constraints, or internal structural changes, every lender faces its own challenges to do more in the current market.
Being realistic for 2011, subject to any major reforms, I’m not sure I can see anything too different from 2010.
I believe the best we as brokers can hope for is an unchanged appetite in lending volumes. I’ve had a number of bets that lending doesn’t go over £140bn – in other words almost exactly the same as 2010 without external (ie the government) stimulus.
Another significant factor affecting intermediary mortgage volumes is how the lenders respond to their own branch performance as they try to strike a balance between what they can offer brokers and what they offer as a direct channel.
In particular, look for what Lloyds Banking Group and Royal Bank of Scotland do in branch. And we would all really benefit from HSBC moving into the broker channel. That would be my wish for 2011 – it is well capitalised and highly professional and would make a difference.
For building societies, the current 0.5% base rate will make it difficult for the sector to move forward significantly with 2011 lending volumes. There is just no scope to manage margins between savers and borrowers.
But there are a number of building societies to watch in 2011. Top of my list is Yorkshire Building Society, as its acquisitions and mix of brands means it should move forward.
I’m also intrigued to see what happens with Coventry Building Society, which provides good choices in buy-to-let, and Kent Reliance, now owned by JC Flowers. I hope the Kent Reliance acquisition is not the last by US private equity players as they may now look at UK mortgage margins as a good opportunity.
Given the economic and house-building landscape, all lenders will face increased pressure to fund buy-to-let and at Countrywide we saw record levels of tenant demand in 2010. Unfortunately the perceived risks associated with buy-to-let will limit the appetite of many mainstream lenders.
In 2011 as funding slowly eases we will see more activity in this market generated by niche lenders such as Aldermore, Kensington, Precise, Paragon and Platform in the buy-to-let market. This reflects the margin and risk opportunity that buy-to-let presents, all of which hope to provide the kind of company, partnership and portfolio of products that the market needs.
In terms of new lenders, I expect Tesco to make the largest impact in 2011 but I suspect it will only operate in direct channels. I’m not expecting it to start with brokers but never rule out its impact. An entrant of that quality will make an impression.
I expect remortgage products to remain in relatively short supply. Lenders usually find these products are the shortest term and least profitable in their portfolio. Hence supply may struggle. RBS and Woolwich Barclays really helped last quarter, hopefully this will continue.
In summary, I expect it to be another tough year for brokers – we remain reliant on lenders for providing good products to deliver mortgage volumes. Volumes will not move dramatically forward because of a mixture of liquidity funding and capital allocation issues. In addition, we will continue to be reliant on the clearing banks, currently excluding HSBC, for the intermediary channel’s continued health.
We will need to work together as partners and show we can deliver quality assets in the sectors and volumes needed.