This week ten years ago saw – arguably – the first major event of the financial crisis, as BNP Paribas shut some of its funds due to concerns about the true value of the collateralised debt obligations in its portfolio.
The resulting market panic led to events that now need no explanation for Mortgage Strategy readers – the collapse of Lehman Brothers, the run on Northern Rock and the bailout of high street banks by the UK Government.
A decade on, what lessons has the mortgage market learned from the crash, and what could it do better at tackling?
One obvious improvement has been tighter regulation of the market. While some argue that some areas of mortgage regulation are now too strict, there is no doubt that some of the excesses of the 2007 mortgage market needed curbing.
UK Finance spokesman Bernard Clarke says: “Lenders and their trade body have played a major role in contributing to, and helping to shape, regulatory reform. The representative body sought to take a lead in this area, and led appeals for the introduction of statutory regulation long before it was implemented in 2004.”
Clarke adds that the reforms brought in by the Mortgage Market Review have “been deemed a success”.
He adds: “Reforms by firms and regulators have restored confidence in the UK mortgage sector. We now have a market in which there is plentiful funding, some of the lowest borrowing rates ever seen, challenger firms and a range of different types of lender, choice for consumers and a regulatory system which reinforces confidence.”
Building Societies Association policy adviser Sarah Wilde says that the Financial Policy Committee’s role in looking out for future systemic issues is a major lesson learned from the events of 2007.
She says: ” It’s fair to say that noone predicted the events of last time. There was noone looking at that before.”
Regulation and tougher capital requirements for lenders are also big changes from the market of ten years ago, Wilde says. But she adds that the rising power of bodies such as the Financial Services Compensation Scheme also give consumers greater confidence in the financial system, a trait often missing from the post-2007 fallout.
Legal & General Mortgage Club director Jeremy Duncombe also points to regulation as the main lesson learned from the crisis.
He says: “The years after the financial crisis marked the beginning of a long road to recovery. Yet, nearly a decade on, the reforms and checks put in place have now built a safer and more robust financial system.”
The mortgage market has also done a good job of rebuilding since 2007, and is now more resilient that ever, Duncombe adds: “From increased regulation, the European and Scottish referendums, two General Elections, Brexit, and Trump, to other recent turmoil we have seen, the market has grown despite the challenges.”
Former chancellor Alastair Darling says banks are more financially secure than in 2007, and regulators more ready to step in, according to a BBC interview.
Room for improvement
The mortgage market has clearly learned a lot from the events of 2007. But what could it do better?
Darling says: “The biggest danger is complacency. And of course in a few years’ time when institutional memories start to fade, and the people around have all gone and retired, then that’s where the risk occurs.”
Wilde says a base rate rise will catch many consumers unaware, and that the market can do a better job of communicating this potential issue to its customers.
She says: “I think something still to learn is – there are so many consumers that have never experienced a rate rise. We expect it will move slowly when it does move up. But It’s making sure that people are preparing for that now. Firms do have to stress test to make sure consumers can afford a rate rise, but there is room here for firms to give advice while rates are low.”
Clarke says the mortgage market must stay vigilant to ensure future systemic risks are identified and headed off.
He says: “Have lessons been learned? Yes, but the lending industry is not complacent about the future. UK Finance and mortgage lenders will continue to monitor how effectively the regulated market is performing. And it will remain important to strike the right balance, so we will also be mindful of ways in which regulatory intervention may affect the market disproportionately.”