The most important element of the Budget for the mortgage market may prove to be the asset-backed securities guaranteeThe big news at the beginning of April was the G20 meeting of the world’s leaders in London.
After millions had been spent on flying in the grand statesmen, racking up the number of security personnel on patrol and treating delegates to a slap-up dinner prepared by none other than celebrity naked chef Jamie Oliver the summit achieved – not a lot really.
As seems to be the order of the day in the present environment, billions of dollars were dispensed around the globe as a result of the negotiations, leaving many of us still lost as to where the cash is supposed to be coming from.
Some $500bn was pledged for the International Monetary Fund to help struggling economies while $250bn was earmarked to boost world trade. A $250bn IMF overdraft facility was also set up and $100bn was set aside to lend to the world’s poorest countries.
It was also agreed that the IMF would raise $6bn from selling gold reserves to increase lending to poor countries which, if chancellor Alistair Darling’s Budget later in the month was anything to go by, could soon include the UK.
But the biggest drama at the summit came outside when protesters clashed with police.
A Royal Bank of Scotland building in the City took a battering, as did quite a few protestors apparently. Mercifully, the likes of Sir Fred the Shred were unaffected. Be thankful for small mercies.
There was bad news for the UK government after it was revealed that the number of borrowers in arrears of three months or more at nationalised lender Bradford & Bingley had rocketed by 198%.
Richard Pym, executive chairman of B&B, said: “2008 was a turbulent year for banks and particu- larly disappointing for B&B.
“Against a deteriorating economic background the board took a series of prudent financial decisions to dispose of non-core lending portfolios, to raise committed secured wholesale funding facilities and to seek additional capital via a rights issue.”
Meanwhile, fellow nationalised bank the Royal Bank of Scotland wasn’t faring much better. The beleaguered lender revealed that more job cuts are in store as it looks to make annual cost reductions of 2.5bn over the next few years.
Chairman Sir Philip Hampton said: ” In the UK this year so far we have said that around 2,700 posts will go. This will not be the end of the story and more cuts are ex-pected in the UK and internationally in the period ahead.”
Abbey for Intermediaries generated some waves in the industry when it ruled out paying brokers proc fees for retention sales after realising the financial case for such payments did not stack up.
In the same week Abbey revealed the reason it withdrew from the shared equity market was that it deemed the schemes too risky. The lender pulled the plug on shared equity in the middle of March and has since been processing its pipeline cases.
Ricky Okey, managing director of intermediary distribution for Abbey and Alliance & Leicester, said: “There are numerous shared equity schemes in the market which makes it complicated for customers as well as complicated for us to underwrite.
“We are a mass-market business so it is difficult for us to get involved in niche markets. That doesn’t mean we don’t want to be supportive of first-time buyers, but not with this model.”
Meanwhile, there was a bit of excitement in the financial services industry that was not related to the credit crunch for a change as supermarket giant Tesco announced it is planning to open bank branches in 30 of its stores.
Tesco has been running a store-based bank in Glasgow since 2006 and plans to open three more branches in Brislington, Blackpool and Coventry this month.
Cheltenham & Gloucester said it was restricting it’s lending criteria. The announcement from the buy-to-let specialist – part of the Lloyds Banking Group – led many in the industry to question the group’s commitment to buy-to-let, with some wondering whether BM Solutions will follow suit.
As part of C&G’s new criteria buy-to-let investors wishing to approach the lender for funding must have no more than three properties mortgaged to any of the lenders in Lloyds Banking Group – which includes BM Solutions – and mortgage commitments of 500,000 or less across the group.
Borrowers must also have a minimum sole or joint income of 35,000. Cases that don’t fit these criteria will have to be individually underwritten.
A C&G spokeswoman said: “We are beginning to combine criteria but the individual brands have separate rules.”
Then shadow chancellor George Osborne offered some helpful advice to the government as he declared that banks bailed out by the government could pose a risk to financial stability.
In a speech at the Royal Society of Arts in London Osborne argued that big banks bailed out with taxpayers’ money may feel emboldened to take irresponsible risks.
He said: “Not only do bigger financial institutions do more damage when they get into trouble but their size and ‘too big to fail’ status could also encourage them to behave irresponsibly and take risks smaller banks dare not.”
Osborne believes there may be a case for big banks to be broken up to mitigate risk.
He added: “We should consider having smaller banks. It would be a bitter irony if we came out of this crisis with a banking system that is even riskier than the one we had before.”
So that’s something to look forward to, eh?
The Council of Mortgage Lenders warned that separate debates over the future shape of mortgage regulation in the UK and Europe risk causing confusion.
Proposals by the Financial Services Authority and the European Commission are being developed simultaneously.
The FSA is working on a discussion paper to be published in September that will set out proposals for UK mortgage regulation while last month the EC published a plan intended to clean up financial markets.
In its newsletter the CML stated: “We will continue to campaign for complementary proposals in the UK and Europe but the challenge will be considerable. There is a risk of confusion and regulatory overload if there is conflicting intervention.”
Meanwhile, it was a case of stating the bleeding obvious for Labour. The government is apparently keen to see a rise in the number of 90% LTV products.
This comment was made by Ian Pearson, under-secretary of state for business, enterprise and regulatory reform, in a House of Commons debate last month.
Pearson’s remark was in response to a question from Labour MP Gordon Banks.
Banks said: “Most products now demand large deposits of up to 30% but why? Could it be that lenders have individuals’ best interests at heart and want to ensure they can cope with their repayments? I don’t think so.
“I believe they are protecting their backs against a further fall in house values. The solution is simple. We must return to widely available 90% LTV mortgages if we are to have any hope of saving the industry.”
Banks went on to ask Pearson why state-owned lender HBOS has only been lending at 80% LTV on new-build properties since the beginning of the year.
Pearson said: “The government has made it clear that it wants to see a mortgage market that functions well, where lenders lend responsibly and borrowers have access to a wide range of mortgages that they can afford to repay.
“I share the ambition of seeing more 90% LTV mortgages being offered.”
Well, we all share the same ambition. That’s a start isn’t it?
But then came bad news for some building societies when ratings agency Moody’s downgraded them in the wake of the partial nationalisation of Dunfermline.
Mutuals are urgently requesting further information about the firm’s analysis. It hacked West Bromwich’s bank fundamental strength rating to E+ from C- and Chelsea’s to E+ from C.
Other societies downgraded include Britannia, Coventry, Nationwide, Newcastle, Norwich and Peterborough, Principality, Skipton and the Yorkshire. A Financial Services Authority spokesman said: “It is important to note that all the societies rated by Moody’s passed the stress tests we made them undertake to qualify for the government’s credit guarantee scheme last autumn, except Dunfermline.”
The latter part of month was dominated by the big nothing that was the Budget. The headline-grabbing news was the enormous amount of debt the country would be saddled with as a result of the recession and the government’s spend, spend, spend approach.
The UK is 175bn in debt. In other words, workers each owe Protesters at the G20 summit make their point6,000 while for the entire population, including schoolchildren, the debt works out at 3,000 per head.
Darling forecasts that public borrowing will fall to 173bn in 2010. He maintains that the deficit will be halved in the next four years but that to do this any earlier would choke off recovery.
For that massive amount of debt we got an extended Stamp Duty holiday for properties worth less than 175,000, an extension of the Income Support for Mortgage Interest Scheme and the introduction of the Homeowner Mortgage Support Scheme. Exciting stuff.
There was some good news with the announcement that the government would cover mortgage-backed guarantees. This was broadly welcomed, with Michael Coogan, director-general of the CML, claiming it was the most significant part of the Budget.
Coogan said: “The most important element of this Budget for the mortgage market may be the asset-backed securities guarantee.
“This potentially offers an opportunity to restart the capital market funding that will be a crucial factor in delivering an adequate supply of mortgage credit.”
Peter Bolton King, chief executive of the National Association of Estate Agents, also welcomed the move.
He said: “There is a huge demand for property that is being frustrated because responsible individuals do not have access to appropriate levels of finance.
“Hopefully, this measure will go some way towards alleviating that and I call on the government to check it goes far enough and step in if it does not.”