With the latest figures from the BBA showing that lending in the secured loan sector was down again in November, it is perhaps a brave man who can predict that the future is going to turn rosy any time soon.
With little overall evidence being published, statistically speaking, the bad news, according to the BBA, is that new personal loans last month totalled £1.7bn, down from the £1.9bn level of November.
The continued decline contributed to a 37.7% drop compared to a year earlier.
In the past few weeks we have also seen the market’s lending capacity further diminished with lenders Paragon, GE and Cattles/Welcome reducing their appetite for loan business.
Robert Sinclair, director of the AFB, confirms that the current situation is not good and the future is still uncertain but that the market is approaching the floor from which it will recover.
He says: “I am not as hopeful as many commentators, as I believe that whilst we have seen many market exits and significant reductions in appetite for higher LTV loans, there is still a significant risk that more lenders could leave or criteria could be further restrained.
“However this is not based on any specific knowledge rather the caution of someone who has been through a number of previous recessions. Importantly, however I am confident that we are near the bottom of the downturn.”
What about the lenders’ perspective? John Prust, former sales director at SPPL and whose new secured loans venture is pencilled in to launch in 2009, raises the point that without a return to health in capital markets, banks will be in no position to provide funding, but is optimistic that the process should begin this year.
“The availability of finance has simply dried up, the scale of which has not been seen before in post-war history. Sooner or later a thaw in the capital markets will happen, and I am hopeful that this will occur around late summer this year. Without this oil, the housing market will remain in reverse,” he says.
Simon Stern, director of independent and specialist lender, Prestige Finance, believes that the likelihood of large scale fresh funding is still some way off.
He says: “Regrettably, I feel that there is a lot still to do before confidence returns to the market and only when it does can we then begin to talk about having seen the worst of the downturn.
“Currently banks are seemingly incapable of putting across any sort of positive message across that they actually want to help. We need to see them positively reassess the opportunities to work with well run lenders like ourselves.
“Prestige has a good track record in the industry in terms of risk management with well vetted distribution and banks could begin to allocate small tranches to get a proper feel for the quality of business before making larger commitments. There is profitable business to be written with minimum downside, even at this stage in the cycle.”
On the distribution side of the equation, demand for loans remains strong and as secured loans packager Andy Moody, managing director of Loan Options, says, the need for secured loan products has not diminished.
He says: “We all know the demand is out there. The problem is actually finding the facilities to meet that demand. Yes, it is tough, but loan enquiries are coming in thick and fast and we are writing as much business as our lenders will allow. The new reality has seen many businesses go to the wall, but as demand remains buoyant, then we just have to sit tight, do the business we can and wait for the funding tap to come on again.”
However, Sinclair believes that conditions are already reaching a point which will begin to make new funding look attractive.
He says: “Interest rates are now moving to a point that makes the market attractive to new entrants. These will be limited tranches of funds, circa £100m to be placed on strict criteria. This will help but should not be seen as long term support for the market. Only when the larger players with back books lend significant amounts again and we see relaxing of criteria will we see volumes expand again.”
Prust believes that stabilising the property market is a key ingredient of attracting lenders back.
He says: “Apart from the markets freeing up, a prerequisite is that property prices must stop falling and stabilise. No new lender is going to enter the market knowing that the value of their collateral is diminishing and not knowing when that trend will end.”
The key factors for a return to more normal business then centre round bank confidence, a freeing up of capital markets and a stabilisation in property values.
At the time of writing, even given the massive amount of national government support around the world to the banking sector, the fact remains that damage to confidence and the need to rebuild depleted capital bases is stifling attempts to restart the markets.
As a result, lack of supply in the amount of money available for borrowing is a major factor in the fall in property values. The perfect storm.
Looking for some green shoots, Stern at Prestige sees some possible interest from the Middle East, but thinks that private investors looking for better returns might offer a more likely source of funding.
He says: “It appears that the only banks that may be looking to lend and are able to lend are the Middle Eastern banks and possibly one or two based in the Far East.
“One would like to think that with all the money that has been pumped into UK banks, they will at some point in the not too distant future actually be prepared to release some of the funds for new lending, but at the moment there doesn’t appear to be any positive signs regarding this.
“The concept of secured lending is still a good one and with the very small returns currently on offer from banks, building societies and on bonds and such like, private investors with cash could be attracted to the returns that can be achieved in secured loan lending. However, there is still the inherent risk in lending on property in the UK and this is what could prevent larger new entrants coming into the market in the short to medium term.”
The effect of regulation generally should not be underestimated. While most pundits feel that regulation at the consumer end has had a beneficial effect on the relationship between lender, intermediary and the buying public, newcomers coming in as private or institutional investors might be put off by the entry conditions and mooted government initiatives to potentially freeze repossession in the event of non payment.
This could act as a brake on new investment and actually slow up the introduction of new funding sources.
Moody, says: “With the established lenders pulling out or pulling back the scale of their lending, it is a shame to think that the road to market has become more difficult at a time when we could really do with help to encourage new blood.
“Of course, the intentions behind the rules are for the best of reasons however, it would not hurt for the implications of raising the bar to be set aside the need to make it easier for new sources of funding to be encouraged to invest.”
Looking to the future, the shape of the new market looks likely to be significantly different in shape.
Sinclair at the AFB believes that the secured loans sector will form part of a more integrated approach to financial planning where individuals are counselled as to whether an unsecured (overdraft, credit card or loan), secured or mortgage solution is best.
Where none applies then referral to a debt counsellor will follow. He believes that the secured loans market can recover to be worth £5bn per annum, but more in the prime space with some use of equity to resolve shorter term funding issues for some individuals.
As a secured loans packager, Moody agrees that better intermediaries have already started to see past just one solution.
He says: “With the withdrawal of so much of the high LTV, higher risk products, advisers have had to recognise that where loans are not available anymore, they have to adapt and offer other viable alternatives such as debt solutions.
“Frankly, I think this is the shape of things to come. Advice in future will be less to do with product and more about providing services that are specific to each client. Secured loans and remortgages will be just a part of the advisers’ armoury of the future but no longer just a default solution.”
For Stern, the market bears a striking resemblance to that of the 1980’s with only a small core of lenders active. Any meaningful expansion only beginning with a stable property market and banks looking to trust proven distribution conduits like Prestige to provide the proper expertise in terms of quality control and viable distribution.
Prust sees a smaller market but one where the intermediary has a vital role to play.
He says: “It will undoubtedly be a smaller market than we have been used to and dominated more by larger players, both introducers and lenders alike. The liberal criteria and generous commissions offered by lenders in the past have gone for good. Intermediaries will need to supplement their income with increased general insurance sales and customer fees.
“However, let no one be under any illusion, the public needs a strong intermediary sector operating in a vibrant secured loan market. Introducers serve an invaluable need to our industry, not only in helping the public obtain finance, but equally importantly by making them aware of the many different options available.
“These considerations will be as important in the future as they are today.”
With the initial negative reaction by the markets to the massive stimulus package announced by the US Treasury clearly demonstrates the current lack of confidence in central government to find an encompassing silver bullet, globally we are still some way from seeing the bottom of the downturn. The secured loans sector being a reflection of the wider market will continue to follow this trend.
However, the difference between the current contraction in lending capacity and the entry of new funding is more delicately balanced than many have believed.
There are definite signs of interest from investors, which is as close to the green shoots as we are likely to get in 2009.
However, the serious tipping point is only going to be reached as confidence rises leading to a freeing up of the capital markets and evidence that the housing market is beginning to stabilise. So what price confidence?