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A glimmer of light at end of the tunnel

With the latest figures from the British Bankers’ Association showing lending in the personal loans sector was down again in December, it is perhaps a brave man who can predict that the future is going to turn rosy any time soon.

The bad news, according to the BBA, is that new personal loans in December totalled £1.7 bn, down from the £1.9 bn seen in November. The compared with a year earlier. In the past few weeks we have seen the market’s lending capacity further diminished with Paragon, GE Money Home Lending and Cattles/Welcome reducing their appetite for loan business.

Robert Sinclair, director of the Association of Finance Brokers, confirms that the situation is not good but says the market is approaching the floor from which it will recover.

“I am not as hopeful as many commentators, as I believe that while we have seen many market exits and reductions in appetite for higher LTV loans, there is still a significant risk that more lenders could leave or criteria could be further restrained,” Sinclair says.

“This is not based on any specific knowledge rather the caution of someone who has been through a number of recessions. But I am confident that we are near the bottom of the downturn.”

What about the lenders’ perspective? John Prust, former sales director at Southern Pacific Personal Loans and whose new secured loans venture is scheduled to launch this year, 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 dried up, the scale of which has not been seen in post-war history,” he says. “Sooner or later a thaw in the capital markets will happen, hopefully around late summer this year. Without this oil, the housing market will remain in reverse.”

On the distribution side, demand for loans remains strong and as Loan Options managing director Andy Moody says, the need for secured loan products has not diminished.

“We all know the demand is there,” he says. “The problem is finding the facilities to meet that demand. It is tough, but loan enquiries are coming in thick and fast and we are writing as much business as our lenders will allow. Many businesses have gone to the wall, but as demand remains buoyant, we just have to sit tight and wait for the funding tap to come on again.”

But Sinclair believes conditions are already reaching a point which will begin to make new funding look attractive.

“Interest rates are moving to a point that makes the market attractive to new entrants,” he says. “There will be limited tranches of funds of around £100m to be placed on strict criteria.

“But only when larger players with back books lend significant amounts again and we see relaxing of criteria will we see volumes grow.”

Looking for some green shoots, Simon Stern, director at Prestige Finance, sees some possible interest from the Middle East, but thinks private investors looking for better returns might offer a more likely source of funding.

“It appears that the only banks looking to and able to lend are the Middle Eastern ones and possibly a couple in the Far East,” he says. “One would like to think that with all the money pumped into UK banks, they will be prepared to release some of it for new lending, but there aren’t any positive signs.

“The concept of secured lending is still a good one and with small returns on offer from banks and bonds, private investors with cash could be attracted to the returns that can be achieved in secured loan lending. But there is still an inherent risk in lending on property which could prevent larger new entrants coming into the market.”

The effect of regulation should not be underestimated. While most pundits feel regulation at the consumer end has had a beneficial effect on the relationship between lenders, intermediaries and the public, private or institutional investors might be put off by the entry conditions and government proposals to potentially freeze repossession in the event of mortgage non-payment. This could slow down the introduction of new funding sources.

Looking to the future, the shape of the new market is likely to be significantly different. Sinclair believes the secured loans sector will form part of a more integrated approach to financial planning where individuals are advised on whether an unsecured credit card or loan, secured or mortgage solution is best.

He believes 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.

For Stern, the market bears a striking resemblance to that of the 1980s with only a small core of lenders active. Any meaningful expansion will only begin with a stable property market and banks looking to trust proven distribution conduits to provide expertise in terms of quality control and viable distribution.

Prust sees a smaller market but one where intermediaries have a vital role.

“It will undoubtedly be a smaller market than we have been used to and dominated more by larger players,” he says.

The initial negative reaction by the markets to the stimulus package announced by the US Treasury demonstrates the lack of confidence in central government to find a silver bullet. The secured loans sector will continue to follow this trend. But the difference between the contraction in lending capacity and the entry of new funding is more delicately balanced than many have believed.

There are signs of interest from investors, which is as close to green shoots as we are likely to get in 2009. But the serious tipping point will only be reached as confidence rises, leading to a freeing up of the capital markets and evidence that the housing market is beginning to stabilise.

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