The mortgage drought anomaly

On Wednesday 29 April Lending Strategy is holding a mortgage funding conference in Manchester to explore how the different providers in the mortgage chain can work together to ease the mortgage drought.

The idea for the event goes back some time and was sparked off by the lack of urgency that the government was showing in addressing the problem. But with the Bank of England’s £50bn Special Liquidity Scheme now on the table, I’ve been wondering if we have been overtaken by events?

Well, if our target audience had been the big banks I might have conceded that our timing was out of joint but looking at the package it appears to do nothing to alleviate the problems of the building societies and specialist lenders but lets face it, they don’t have the ear of government and when it comes to regulation, the Financial Services Authority would perhaps prefer to deal with a few big players than a multitude of smaller lenders. Indeed, I sometimes wonder if that is why it makes the rulebook so complicated.

Curiously, and as pointed out by Gary Styles of Hometrack in our May issue, Bank of England figures show that while house purchase approvals have fallen by 39% over the last year, a large proportion of this fall has occurred in building societies and among wholesale funders. Banks have seen a more modest fall of 27%.

And, as Styles points out, when you look at the performance in the remortgage market the differences are much starker. Banks have actually seen a 15% rise in remortgage volumes since last year while building societies have seen broad stability. It is in the wholesale funded sector where loan volumes have fallen by 48%.

In the autumn of last year, when the credit crunch began to bite, I had thought that the building societies, funded as they are by retail savings, would be the least vulnerable to the changing market and that it would be the specialist lenders, which ironically have been helping the government to meets its homeownership targets with ever more marginal lending, which would be the most damaged.

The casualty list of lenders that have fallen by the wayside show that I was right about the latter but what are the problems for the societies?

True, they are less vulnerable because of their business model and can batten down the hatches. However, there are two issues that affect them. The first is that the amount of money they can raise though retail savings is limited both by price and the pool of retail money out there. Second, post Northern Rock, the FSA has upped the stakes in terms of the liquidity they must hold and this has taken an estimated £20bn out of the potential pool that the sector has to lend on mortgage. Across the industry as a whole this could equate to £100bn problem!

In other words, the powers that be are giving with one hand and taking with another