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The great debate

Industry experts discuss this year’s big issues from MMR, funding, remortgages to buy-to-let and look at the potential pitfalls and opportunities 2011 may hold

Front row: Dev Malle, sales and marketing director, Personal Touch Financial Services, Emma Hollingworth, director of mortgages, Simply Biz, Sally Laker, managing director, Mortgage Intelligence Holdings, Bob Hunt, chief executive, Paradigm Mortgage Services Back row: Barry Naisbitt, chief economist, Santander UK, John Malone, group chairman of PMS, Iain Lang, chief credit officer, Santander UK, Grenville Turner, chief executive officer at Countrywide, Adrian Whittaker, key accounts director, Abbey for Intermediaries

Looking back, 2010 will be remembered as a relatively static year in terms of lending and house ownership. But behind the flat figures the year has been defined by radical shifts in both politics and regulation. Along with a change in government and the announcement of major cuts in the public sector, the Financial Services Authority has released two further consultation papers as part of its Mortgage Market Review.

But what will happen next year? Will the MMR end up being the radical reshaping of the UK mortgage market that many fear? Will we see more funding come in to the market or will house prices fall further?

To debate the main issues Mortgage Strategy, in association with Abbey for Intermediaries, gathered a host of industry luminaries to find out what they think 2011 will have in store.

Sally Laker:
The word that immediately comes to mind is flat – whether gross lending for the end of this year is £137bn or £140bn we’re all prepared for a static year with nothing really exciting in terms of lending. But I hope that towards the end of next year it will take a turn in the right direction. The market seems steady at the moment but it still feels fragile.

Grenville Turner: At a net lending level, next year is likely to be flat. Gross lending might be up as a slight increase in percentage and volume of remortgaging starts to come through.

We are starting to come to a point in interest rates where people are looking to remortgage away from SVR so I think there will be a gross lending increase. I don’t think it will be significantly above what we’ve seen in 2010 but most of that will be from the remortgaging sector rather than transactional.

John Malone: I’m going to disagree. I think next year that my spread will be between £125bn and £135bn for gross lending, net lending will possibly be zero, but it could be minus. I don’t see much change in interest rates. The two triggers for me will be lack of confidence in the property market and also the unemployment factor will be quite an issue.

This time last year we had the benefit of the Stamp Duty incentive and unless a similar type of scheme comes into being I can’t see there being many changes. The issue isn’t so much the regulator or lender, I think the issue now is the government and it has to play a different part in the market with the likes of building sector.

Barry Naisbitt: If you just think about the big economic picture and the issues that we all face, setting aside mortgages, do we think at the end of next year we will feel happier and more optimistic about the future than we do now?

I think we probably will. But I don’t think it will be enormously different because we’re still facing some of those challenges of fiscal consolidation and some country somewhere in default. We will still be concerned about students paying back large amounts of money and the problem of first-time buyers will still be there in terms of people having to pay a lot of money for deposits. So, where we do see any changes, they will be gradual.

The reason why remortgaging has started to increase is that a number of lenders want to balance their books and have aggressively priced products at low LTV lending. But they’re fishing in the same pool as everyone else and the only way they can win is by price. So you’re starting to see remortgage products in the 2.5% to 3% category, which is below what most people are on their SVRs. For the first time it makes sense for people to remortgage and that is what has generated activity.

Dev Malle: The sudden interest in remortgaging has certainly been down to the fact that it’s the right time for borrowers. But another reason is the fact that lenders’ pipelines are low and any new applications will count towards their 2011 business levels, rather than 2010 – they are behind schedule.

Iain Laing: There has to be some coincidence with the housing market not turning up in September and a cluster of cheap remortgages arriving in the market. That churn in the remortgage market can drive gross lending but it doesn’t do much for net lending.

In terms of new lending and remortgaging the buy-to-let sector has seen a significant increase in the back end of 2010 with some people refinancing their buy-to-let portfolios. But actually there are a lot of people returning to the sector on the back of improved yields and giving themselves a pension fund.

Laker: It could be quite big next year because a number of lenders who aren’t doing any buy-to-let now say they’re looking at it.

Turner: And it’s also one of the best-performing portfolios that many lenders have got, other than those who frankly everyone always knew were screwing up.

Emma Hollingworth: Consumer confidence is still quite low. Because of tax changes, VAT changes, pay freezes and all those kind of things, consumers are trying to work out what income they are going to have next year. Many are not in the position to say I’ve got the confidence to move, so it’s not going to be a buyers market so there are likely to be a lot of buy-to-let opportunities next year.

Malle: Is the rise in demand for buy-to-let a sign that the UK has gone through a cultural transition where renting, like it is in many parts of Europe, is now more accepted? In the Thatcher years, if you didn’t own a property there was almost a stigma attached to it. We’re moving now to a position where if people are renting for a period, it’s seen as common sense.

Hollingworth: If you look at the first-time buyer market you’re looking at needing between £35,000 and £40,000 as a deposit before you can even get onto the housing ladder. Until we see lenders move up the risk curve slightly on the LTV side of things, then I think renting will be attractive to would-be first-time buyers.

There was a meeting that we had sometime ago with the Bank of England, arranged via the Association of Mortgage Intermediaries, and it was clear that for a period of time they did not want to see, I think until 2013 at least, huge price rises in properties. They would prefer to see property prices come down by a further 15% to 20% – that means the first-time buyer has a better chance than at the moment.

They want to control the economy and in doing so they want to take the heat out of people’s equity and property.

We seem to talk a lot about government but I think the big driver here will also be the Bank of England and the Treasury over the next 12 to 18 months.

Laing: It runs a little bit counter to their actions in terms of £200bn of quantitative easing and a 0.5% interest rate.

Malone: But what it says and what it does seems to be at odds. You sit in a room with them and they know and have said that there would be casualties out there and that people would be trapped in their properties.

They accept that – they might not like it – but they understood that there would be casualties until they feel they’ve got a better handle on the economy and that the UK population is not using property as a bank balance.

Turner: The one thing that is patently obvious is that there is a lot of pent-up demand. We’re now in our third year and about to go into our fourth year of a half-sized market. I’m not talking about boom years, I’m talking about half of a normal-sized market.

The long-term average for property transactions is 1.25 million per annum and we’ve been running now at the best part of 600,000 for the better part of three years and almost certainly we’re looking at another broadly similar year in 2011.

That creates a situation of demand that I think is an issue because it will get released at some stage and that in itself will cause problems particularly for house price inflation.

I’ve had the same conversations with the Bank of England that Malone has, and the thing that it never seems to get is the fundamental impact that house moves have on retail and manufacturing. In most recessions property has led because when property moves slowly it has a dramatic effect on retail and a dramatic effect on manufacturing.

Whether it’s white goods, carpets, trades people, equity release for purchasing cars, house moves have a massive multiplier effect on those parts of the economy.

Both of them. Although we’ve seen the wholesale markets ease slightly, funding is still an issue and until this is addressed we’re not going to see lenders pushing up the risk curve as much as we, distributors and consumers would like to see.

Regulation will have an impact as well because at the broker level you’ve got to think about the cost of that regulation and how that might affect them especially if they are a small brokerage and teetering on the edge of whether they stay or go.

Adrian Whittaker: Funding is probably the main focus for a lender and for those that are either dependant on state funding or have problems in terms of raising money – whether that’s through wholesale or retail – then they may use the regulatory aspect to coach their decisions with regard to where they put their funding.

That will then raise the question of whether they support direct over and above intermediaries, will they support both channels or, like us, support intermediaries to a significant extent and we have no plans to change that.

So I think funding is the key issue and I’m hearing that certain lenders are looking to be more aggressive in 2011 but we all want to fish in the same pond in terms of risk profile – that’s going to be interesting. But certainly we’re happy with what we’ve seen so far in terms of regulatory changes and feel we can accommodate that through intermediaries as well.

Laing: Funding is finite for the market – over £300bn of government sponsored funding in the market via the Special Liquidity Scheme, £160bn of which needs to be repaid by the end of next year.

The wholesale market has done better than anyone could have imagined this year yet we’re only £20bn up net year to date – £20bn net doesn’t take you near enough to the £160bn that needs to be repaid next year.

So the money can either come from wholesale investors but it isn’t coming fast enough that way. It can come from retail deposits but that seems to run at a speed of £20bn to £30bn a year.

The rest comes from the deleveraging of banking portfolios and unfortunately that is money coming out of corporate and commercial credit.

Corporate commercial credit used to be booming but has been deleveraging. Corporate credit, the actual stock of asset, is down about 8% on the year – it really is shrinking. We have not experienced that in the home purchase market and that’s where the funding is coming from to keep our balance sheets matched.

Looking towards 2011, money has to be paid back and it has to come from somewhere and it looks to be a hell of a squeeze. We can sit here, as most lenders will, and say we feel comfortable that we’ll be lending relatively solidly through the year ahead, but when you think about the net lending forecasts I won’t have a house view.

I think there’s every chance that next year is the year that we do negative net lending in the housing market.

Bob Hunt: Funding is a major issue and it’s a threat but changing regulations are constant. It was a requirement and there had to be a significant change in regulations given the excesses of the past.

The piece that had us most concerned was in the MMR consultation paper on responsible lending.

There was a paragraph that described any loan where in any month it was foreseeable that the customer wouldn’t be able to afford their mortgage after their costs – that would have killed about 20% to 25% of the market – the signals the FSA has sent very clearly is that they plan to redraft that paragraph and that’s quite critical. You strip that out and you are left with some difficult rules about debt consolidation and maybe some rules on interest-only, but again they’re moving away from that.

The changes that they’re committed to at the moment don’t look so severe anymore. What they’re positioning has softened over the course of the consultation – the concentration that they’ve got on affordability isn’t where the marginal risk is.

The actual arrears rate by net free cash flow or income multiples, from highest risk to lowest risk is almost flat. As a lender I can be reckless or prudent and meet every letter of the rules that the FSA has published. It will come down to lenders’ attitude to risk and the bigger thing shaping that is not the FSA but funding investors.

It’s the attitude of the wholesale markets to risk of our portfolio that is driving the premium on the pricing of deals at high LTV, which makes it so expensive for a first-time buyer to get to the market. But it’s necessary for us to present a portfolio that funders want to invest in and feel confident investing in.

Looking at that paper on distribution, if you were an intermediary you were probably smiling – if you were a lender, then probably not.

The FSA’s requirement for anyone involved in mortgages to have the minimum Level 3 qualification will be a big cost for telesales personnel, who I believe are turned over quite frequently – or at least they were when I worked in a bank. The average cost of training is about £5,000.

As far as I know there’s only one lender that pays intermediaries at renewal and I think you might see other large lenders looking at that policy again because it could be that servicing that business through brokers is a plus.

It’s been a year since the first MMR consultation paper came out but I think we as an industry are now representing ourselves better and the FSA is listening to what we have to say much more than it ever was before.

Malone: With the paper on distribution, intermediaries will see they have come out of it reasonably well. The one thing that we all know is that clients need advice and the best people to do that will be brokers.

Hollingworth: And when the funding does come back intermediaries are the best way to increase business.


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