Regulator must tread carefully

This year will be dominated by funding and regulation, and the FSA must not hinder competition which remains the key to recovery, says Peter Williams, executive chairman of Intermediary Mortgage Lenders Association

Two issues will dominate the mortgage market in 2010 – funding and regulation. Conditions in the market improved in the latter half of last year which gives us a solid platform on which to build, but the sector continues to be inhibited by lack of liquidity.

Gross mortgage advances rose from a low of £9.9bn in February 2009 – the lowest since the corresponding month in 2001 – and rose to £12bn by November. We await the December figure from the Bank of England but it is expected that the final gross advance figure for 2009 will be a shade over £140bn. I do not believe 2010 will be significantly better and expect gross advances of between £150bn and £155bn.

Compare that with the 2008 gross lending figure of £253bn or indeed the £362bn of 2007 and you can see the amount of capacity that has been taken out of the market.

Today’s market is dominated by high street banks – 83% of gross advances made in the 11 months to the end of November were written by banks. This compares with 13% from building societies and 4% from specialist lenders.

Perhaps more revealing is the decline from the market peak in 2007. Bank gross advances have declined by 56% compared with 2007, societies have fallen by 68% and specialist lenders have been decimated, falling by 93%.

This is not to say the big eight lenders have had it easy, juggling the need to rebuild their balance sheets with political pressure to retain a flow of funds to the mortgage market. This has been a difficult balancing act and although big lenders have benefited from much reduced competition and government support it has been far from easy, not least having to cope with more intrusive government oversight.

But there is little doubt that other sectors have been hit hardest. With almost all societies facing difficulties raising sufficient funds to lift their capital and liquidity in line with new requirements, pay increased Financial Services Compensation Scheme levies and meet the costs of retail deposits while ensuring profitable lending, 2010 is likely to be another lean year.

The specialist sector has been disproportionately hit by the closure of the wholesale funding markets. As these lenders do not take retail deposits they typically have no other source to fund their mortgage activities so the closure of the funding markets has meant that they have had to close to new business.

But some signs of improvement began to emerge in the latter half of 2009, with a handful of successful residential mortgage-backed residential securitisation deals.
Lloyds Banking Group’s £4bn deal reopened the RMBS market in late September while Nationwide completed a £3.5bn prime residential deal in October. Also, Barclays completed a £1.75bn covered bond issue in September, with Abbey completing a similar £1.53bn deal in October. These deals show that investor appetite for RMBS remains but investors demanded a greater return than prior to the start of the crunch.

It should also be noted that these deals involved big banks and societies. No non-bank lender has yet tested the market with a deal but we hope this will change during the course of 2010.

We are launching a cross-industry grouping called the Mortgage Funding Group this year, aimed at tackling the funding agenda. This will bring all interested parties together including lenders, investors, trade bodies and ratings agencies in an attempt to find solutions to the mortgage funding drought. The group will hold an initial meeting in March and hopefully the initiative will gain momentum as 2010 progresses.

As I have mentioned, regulation will also be a key issue in 2010. The Financial Services Authority’s Mortgage Market Review has stirred much debate but generated little agreement in terms of the market’s future. At present, there is no agreed way forward that will satisfy the regulator and at the same time ensure we have a fully funded, diverse and competitive market.

Perhaps bruised by the level of criticism it has received the FSA is in a robust mood. The MMR accepts that the market has worked well for many consumers but focusses on what it sees as lender and broker failure in general, with a particular emphasis on non-deposit-taking lenders and all lending other than prime.

Review fails to provide answers
It is clear from the MMR that the FSA believes it is the market rather than the regulator that has failed.

Unfortunately, the MMR fails to provide answers. It is confused in some areas such as self-cert and fast-track, has not tackled certain issues such as affordability and offers flimsy evidence to support its case on the failings of non-banks and the extension of the FSA’s scope to include buy-to-let.

The industry does not have long to respond and it needs to be careful and clear about what it asks for, bearing in mind the kind of market it would like to see in future.

But the schedule is tight and with a general election on the way there’s a risk that the MMR will be pushed down the agenda and we will end up with a regulatory environment that doesn’t suit any of the stakeholders involved. That is a scenario that we must avoid at all costs.

At the heart of the review lie two issues – the degree to which risk has been managed by lenders and the need to secure high quality and consistent advice for consumers. If we can make progress on these questions the market will be significantly better for it.

But the spur of genuine competition is needed to give all this momentum. The FSA will have to work hard to ensure that the MMR helps to support an effective and competitive market and that the regime does not discriminate against particular types of lenders.