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Useful lenders are frozen out

February saw the UK blanketed by the heaviest snowfall the country had seen for 18 years – and it was completely unprepared. The infrastructure that supports our way of life sagged under the pressure. Schools closed, offices were deserted and the capital’s public transport system didn’t just buckle, it shut down completely.

The mortgage market has been engulfed by a similar storm. The economic maelstrom which hit halfway through 2007 is of a scale not seen for decades. The securitisation and wholesale money markets have been in perma-frost for more than 18 months.

Lenders are battening down the hatches to avoid further frostbite after their balance sheets suffered dramatic amputations in asset write-downs, and the number of mortgage products has gone the way of the polar ice caps. In February there were just 3,707 products available to borrowers – a year earlier the number was 39,916.

At the eye of the storm is the lending forecast for 2009. The government is pushing for lenders to up their business volumes after the number of loans for home purchase in 2008 totalled just half that for 2007.

The government’s bailout plans are a laudable attempt to restore confidence and ease liquidity, freeing-up capital to lend to home owners. But in practice investor confidence remains low, the active lenders are being pulled in too many directions and too many lenders – including non-deposit takers – have effectively been excluded from the current schemes.

The industry is anticipating gross lending of around £150bn for this year. In our most recent survey of members the consensus was that this estimate was conservative, indicating that there is still a glimmer of hope that lending could improve this year.

While the vast number of influencing factors on the future health of the mortgage market prevents us from accurately predicting this year’s volume of lending, more ascertainable is how this lending will be done. But even here there is a clash of crystal balls.

The Association of Mortgage Intermediaries’ latest economic report in January suggested the volume of lending sourced via brokers would be hit hard in 2009, sliding from around 64% in Q3 2008 to just 45% in Q4.

The latest Financial Services Authority figures released via the Council of Mortgage Lenders also point to a contracting market for brokers, with intermediary lending accounting for 63% of the market in Q4 2008. In the home mover sector, the fall is more pronounced – Q3 2008 saw 61% of home mover mortgages sourced by intermediaries but by Q4 this was 57%.

Although the intermediary share is slipping the fall is limited and not outside fluctuations seen previously. It would be a dramatic shift in culture to see the intermediary share dive to the extent AMI has warned of. Other recent research reveals that brokers are concerned intermediary mortgage lending will suffer further retrenchment. But in this challenging world brokers can offer clients valuable advice in a tough market. Our members recognise this fact. If we are to support intermediary lending overall the wider industry must have access to the government’s bank bailout schemes.

Although a number of intermediary lenders are eligible for government schemes most specialist lenders, that relied on the wholesale markets rather than retail deposits to offer new mortgages, are not. Their lack of access to retail deposits effectively means they are written out of the script.

Not only is this partial approach by the government unjustified, it is incredibly short-sighted. Specialist mortgage products have gained near-pariah status because of prejudices spawned in the US. These should not be applied uncritically to the UK market.

Here, the sub-prime, self-cert and buy-to-let sectors constitute a vital part of the market. In an economy where unemployment is rising the value of these products, appropriately priced for risk, is immeasurable.

And in the future, how can there be an economy driven by self-employment and a housing market where renting is ever more common if self-cert and buy-to-let products are not readily available?

Traditionally, specialist lenders have catered for this end of the market and many would continue to do so were they able to unshackle themselves from the debt on their back books. The reason for this debt not moving has little to do with credit quality – the depression in market sentiment has created gridlock.

It is commendable that the government is attempting to address the funding problem for deposit-taking lenders but it continues to ignore non-deposit-takers at its peril. It wants to keep people in their homes and avoid repossess- ions as much as possible. But by focusing on certain markets it is putting undue pressure on a small spectrum of lenders to provide solutions.

As well as freezing out parts of the mortgage lending market which could help distressed borrowers to help themselves by finding suitable replacement products, this is tantamount to locking these borrowers out along with their would-be mortgage providers.

Since the government has taken it upon itself to ride to the banks’ rescue it must assist all lenders, not just those it finds it politically expedient to help. The sub-prime, buy-to-let and self-cert sectors are crucial components of the mortgage market and they deserve support as much as the prime sector.

If the government wants to help borrowers stay in their homes and deliver a boost in lending it must take a whole-of-market view. It is asking too much of some lenders and ignoring the rest and needs to join up its thinking on the housing market with its work on the funding market. There are resources to be drawn on that have the potential to boost activity and restore confidence.

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