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in my opinion: FLS won’t produce the desired results

The FLS is still tinkering around the edges of the housing problem. It requires far more stringent rules for lending the Government’s money and all of the protagonists need to work smarter

Jon Round MS blog

The Funding for Lending Scheme has recently been painted as the panacea for mortgage market to get lending going again.

While it is true that it will certainly have a more direct effect on the mortgage market than the Bank of England’s quantative easing programme, it still has not been thought through properly and, as a result, the outcome is unlikely to be what the government wants and the market requires.

The issue with Funding for Lending is that it doesn’t tackle the issue of how we get the housing market moving as opposed to increasing funding in the guise of remortgages.

We have help for people purchasing new build houses in the form of the NewBuy scheme, we now have FLS which is boosting remortgages and low LTV purchase, but what about the mass market housing sector and the purchasing of second hand homes? This seems to be missing in the plan.

What we should have had with FLS is much more stringent rules about how the money from Government schemes should be lent, maybe with LTV targets included.

The Government, the Bank of England and the industry as a whole has got to work smarter and work through policies such as FLS and NewBuy at the outset to decide the outcome that we want and what the other potentially less desirable outcomes that may result; then we need to put criteria in place that will deliver the results that we need.

What our market needs is more house purchases. This will help to stimulate the housing market and the economy.

A house purchase affects more than just the price of housing, it kick starts a whole housing chain, what is more it has a knock on effect also stimulating a number of other purchases, as most people buying a new home then spend money on new furnishings, decoration or altering their new home in some way.

Gross lending is not the most important thing that we should be measuring – in fact it is almost an artificial indicator of activity as it doesn’t clearly indicate how much is new lending.

Measuring house purchase transactions is better; remortgaging is just a merry-go-round of passing money from one lender to the next in search of cheaper finance.

Housing transactions are still under half of what they were pre the credit crunch in 2007 according to LSL’s Acadametrics House Price Index.

The main causes of the decline in transactions remain the difficulties in obtaining mortgage finance, with high deposit levels remaining a challenge and lenders’ changing score cards presenting and on-going difficulty.

The problem with Funding for Lending is that it is still tinkering around the edges rather than getting to the heart of that issue. It is the same with the NewBuy scheme: we’ve sold the same number of houses as were sold before NewBuy but using government money to make it viable.

It is very positive that 35 lenders have now signed up to the Funding for Lending scheme, but we need to see the money borrowed get to the people who can kick start the whole housing market – first time buyers and house movers.

Hail the new governor

There are few people that weren’t surprised by the selection of a Canadian as the new governor of the Bank of England to replace Sir Mervyn King. While Mark Carney has good credentials and most people seem to feel positive about his appointment, there is still a question mark over how much he actually wanted to take the job on. The fact that he turned it down once and that he insisted on only a five year term rather than the eight years requested by the chancellor, indicates that it wasn’t a job he was desperate to take.

However he has taken the job and the Canadian economy has been in good shape with Mark Carney at the head of its central bank and has weathered the financial storm better than most other nations, what will be interesting for us is how many of his Canadian policies he will bring here. Early indications are already that he would not have been in favour of QE but rather would like to instigate a long term, low interest rate environment to give borrowers and businesses the reassurance that they can access ongoing cheap credit. Such a policy may well boost confidence and reinvigorate consumer spending in its wake.

Quite what the new governor will think of schemes such as our Funding for Lending waits to be seen. Maybe he also will wonder where the criteria is for such generous lending and interest rates from our own central bank.

Positive news for interest only

The final version of the Mortgage Market Review should have been positive news on the interest-only front. The rules have, mostly, been less draconian than many people anticipated, interest-only has not been banned and as a result there are more opportunities for lenders to move back up the risk curve, however with another raft of interest only products being pulled in the last week it doesn’t look like that’s the case.

Now the final results have been published lenders know exactly what criteria they have to work within and no longer need to second guess what the FSA may or may not introduce.

Up until the final MMR results we had seen a number of lenders withdraw from the interest only arena in anticipation that the FSA would abolish it altogether and then clamp down hard on what may have been seen as retrospective irresponsible lending. The final report should have seen a reversal in this policy and a slow reintroduction of interest only for some people.

But it appears that Abbey for Intermediaries is almost the only lender to take this approach with its innovative interest-only policy. T

Abbey enables borrowers to take out a mortgage up to 50 per cent LTV on an interest-only and then up to another 25 per cent LTV on capital and repayment. This will be of significant help to a lot of borrowers who have a real need for interest-only. What we need now is for more lenders to follow in their footsteps.

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