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Star Letter – Unless lenders start to act prudently funds will continue to be limited and expensive

I must disagree with the writer of the letter in the August 23 issue of Mortgage Strategy titled ’We need to get some perspective on what caused the recession’.

The writer argued that for the majority of people the markets worked well and the banks made money out of it. This had been emphasised by the fact that after one of the worst recessions in 60 years, repossessions in 2009 were still lower than at the tail end of the last recession in 1995.

The main problem was the irresponsible lending that took place that first came to light in the US sub-prime market.

As a mortgage analyst, I advise business and investment analysts on the level of risk taken by mortgage lenders, and for many years leading up to the recession I expressed great concern.

Once the recession started to bite, share prices of the main mortgage lenders plummeted.

The poor quality of their lending then made it difficult for the lenders to borrow themselves and, if they did, it was at a premium rate.

The big issue at the moment is that the lenders appear to have learnt virtually nothing from a risk perspective so they are going to continue to struggle to borrow and it will continue to be at premium rates.

One of the main problems is the use of credit scoring, which not only doesn’t work, but actually makes lenders’ decisions worse – yet many are still using it.

But let’s look at something simpler than the complexities regarding why credit scoring doesn’t work. Let’s take affordability as an example.

Assume a customer earns a basic salary of £40,000 per year gross. This means that after tax and National Insurance, they takes home around £2,500 per month net.

Now all anybody has to do is to go on to lenders’ websites and follow the ’how much can I borrow?’ link.

They then complete the boxes to show that they are earning £40,000 a year gross but that they have monthly loan commitments of £2,500. So every single penny the customer earns is already taken up on existing loan commitments and they have no money left for food, transport, clothes, Council Tax and so forth. They are already hopelessly over-committed.

Yet what do we find? Alliance & Leicester will lend more. Santander will lend more. Lloyds Banking Group, which includes most of the old HBOS brands, will lend you more. Heaven forbid, even Northern Rock will still lend them more.

So even now, after everything we’ve been through, we still have numerous lenders with affordability routines that can only possibly have been designed to facilitate lending to financially over-committed customers.

Until, mortgage lenders start acting prudently, funds will continue to be in limited supply and at premium rates. That, I believe, is the perspective that is lacking.

Keith Butler



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  • Liz 1st September 2010 at 5:13 pm

    Mr Butler is calling for lenders to ‘act prudently’ and states that the online affordability calculators indicate his example customer would be able to borrow funds. He’s wrong. Lenders are so cautious at the moment it’s beyond a joke. They use different affordability calculators than the online version when they ‘underwrite’ an application and are asking the most ridiculous questions of almost every application. They appear to be doing everything they can to avoid lending money to even extremely clean clients. I could bore you for hours with examples and I’m sure most brokers could

    Whilst we don’t want to go back to the bad old days of ‘lend money to anybody that is breathing’ which, as Gray Haired Underwriter correctly points out, contributed to the recession, we need some sense in the market before the whole industry grinds to a halt, nobody can borrow money at all, and people find themselves trapped with a mortgage they can’t afford and a house they can’t sell.

  • Gray haired Underwriter 1st September 2010 at 12:06 pm

    mic2002 I think you are missing the point. Mortgage lending may not have caused the recession but bad lending was very much the reason for the collapse of major players in our market. Poor securitisations resulting in toxic debt and brought many a UK bank/lender to their knees not withstanding the stupidity of NR in borrowing three month LIBOR and lending it 2 years on high LTV fixed rate. It doesn’t take a genius to realise that this was a massive gamble that didn’t pay off.

    The crux of this article is whether or not lenders are now lending responsibility and shows the fallacy that affordability calculators are any better than old fashioned multipliers. Why would anyone want to get involved in a securitisation of loans that are not affordable. Until such time as lenders can trust each other there will be an issue about wholesale funding and that’s what brokers need if the market is to start a return to some form of normality

  • mic2002 31st August 2010 at 5:23 pm

    A mortgage analyst eh? Right then,lets be clear, UK mortgage lending DID NOT cause the recession!Which is what the letter clearly wants to imply.You can call it irresponsible lending or whatever,but thats a fundamental fact.Read the Turner report into the causes – it was instituitonal by nature and involved many different components.The securitization market is running so scared of anything resembling a mortgage.They won’t just lend to the UK alone – its a global issue.The FSA produced the arrears figures – it is they who have said that the problem is not just with mortgage debt.Most current arrears have arisen because mortgages have become unaffordable due to the economic situation NOT becuase they were unaffordable from the start.

  • Paul SIlcox 31st August 2010 at 2:52 pm

    Well said. As another example, how long does anybody think the securitisation market will remain closed to new loan packages if rules including
    a) max 80% LTV
    b) max loan amount of 4x salary (as verified by HMRC), subject to
    c) affordability stress tests including rates to 8% for affordability

    were introduced? Not long, I would surmise. Prices would drop, but so what?