Plight of the self-cert prisoners

2 August 2010 8:00 am

The panel

Jonathan Cornell - Head of communications, First Action Finance
Danny Lovey - Sole practitioner, The Mortgage Practitioner
Andrew Montlake - Director, Corcero

The FSA’s recent update on mortgage lending looks set to make lenders take a much more prudent approach to lending, including the likely elimination of self-certification and fast-track mortgages. Would this act as a further restriction on mortgage lending?

Cornell: It is probably not worth talking about self-cert as the market really killed that off and we have not really seen any for six to nine months. In terms of fast-track, it will obviously slow things down slightly and it will cost lenders more to process but it should not necessarily make a signi-ficant impact on who gets mortgages as lenders could ask for proof of income on those cases anyway. I don’t think it will be a huge effect.

Lovey: As far as conventional, prime clients are concerned, nothing really has changed. Any broker worth their salt will have evidence of proof of income.

The problem is more with the lenders and the additional costs this will put on the back offices. One of the interesting things they were talking about was proof of income and they seem to suggest that the use of accountants’ letters could be used more. But I think the question has really got to be - would traditional lenders be more amenable to an accounts certification of affordability by the borrower? The devil is in the detail on all of these things.

No one is going to kick against proof of affordability. As a broker, I am in the business to try to help people, not to dig a hole for people. The problem is with the self-employed. How do we square the circle for the self-employed? Is it fair that entrepreneurs cannot get a mortgage but their employees are treated as though there is no risk?

’I am not getting too excited about the CML saying lending has increased by 15 per cent. 15 per cent of a very low number is neither here nor there’

Montlake: The FSA has clamped down but to a certain extent the mortgage industry has done that itself. The regulator coming out and saying this, especially with regard to self-cert, will not make a difference because you cannot get hold of a self-cert mortgage anyway.

The problem is that there are going to be a lot of people who are going to be “mortgage prisoners”. They have got hold of a self-cert loan in the past but there are not going to be any self-cert loans for the foreseeable future and a lot of people are going to have issues. These are decent, hard-working self-employed people who merely work their accounts in a legitimate way.

The CML reported last week that gross mortgage lending was up by 15 per cent in June while the BBA reported that applications for house purchases declined over the month. Is remortgaging accounting for a bigger proportion of mortgage lending?

Cornell: The mortgage market is dominated by purchases. The volume of remortgages is creeping up slightly because people are nervous the current rate they are on won’t be available for long, so people are breaking away from standard variable rate. But overall the remortgage market is pretty dead and pretty flat compared with purchases, which dominate the volumes.

Lovey: The chances of doing remortgages has improved a little bit but clients are not panicking to get into a fix. Even people with loans to values of 75 per cent or less, paying 2.5 to 3.5 per cent, are not feeling like they want to go on a two-year fix. Why would they want to pay an arrangement fee of £995 to fix for a two-year period? They don’t want to go for a five-year fix as the difference is too great and they don’t think rates are going to go up.

I am not getting too excited about it and I’m not getting too excited about the CML saying lending has increased by 15 per cent. 15 per cent of a very low number is neither here nor there.

Montlake: The remortgage market is pretty dead really. Most of the business we are seeing is purchase business but that is declining as well.

The next six months are going to be tough for the industry generally. It is now post-Budget and people are holding fire for a bit. House prices have been rising but I am sure that in due course people will return to the market as rates stay low and house prices fall. And also once people are sure of their own job security because it is all about job security.

Many mortgage commentators are suggesting that house price inflation will cool or even reduce over the remainder of 2010. Do you agree?

Cornell: There are several factors. There is the scrapping of Hips so there are more properties on the market and so buyers have a greater choice, you’ve got depressed lending levels so there are less people out there looking and you’ve also got the austerity measures introduced in the last Budget. This means that pretty much everybody in the entire country will have less money in the future than they have now, so I think things will slow down.

Lovey: That is the trend. The estate agents I know and talk to say that is the case. There is only one way the market is going and that is down. When you see newspapers advertising a new price - that is code for reduced. And that is what I have been seeing for some weeks.

Montlake: House prices will fall in the latter part of this year. It is all about supply and demand right now and supply is increasing and demand is falling.

However, there will be very different figures for London and the rest of the country. Generally, house prices will tail off, but in key areas of London demand will remain because there is a shortage of decent property. There will be a marked difference therefore in the capital, which has always been in its unique bubble.

The AMI said in its most recent economic bulletin that it is concerned that British banks will have to refinance up to £800bn of borrowing over the next 18 months and this will further curb their ability to lend. Do you agree with the AMI’s gloomy outlook?

Cornell: Yes. Looking at the figures for what the banks are going to have to refinance, there are some fairly eye-watering amounts that need to be refinanced in a market where refinancing is not that easy.

’I think it is a frightening prospect that lenders will not be able to lend and not just in the near future but in years to come’

Lovey: I think the re-financing starts about mid 2011. Taken at its face value that is right. What we don’t know is whether some of that, or all
of that, will be rolled over. I suspect it probably will, but to some degree the market lending for mortgages is going to contract.

Montlake: I think it is a frightening prospect that lenders will not be able to lend and not just in the near future but in years to come. It is not just about refinancing debt - they have to put money aside for new capital adequacy rules and for remortgages as well. So how much money will be out there in the coming years?

But then the reality is you can talk yourself into a depression. Lenders need to lend money and competition is hotting up. We are going to
have a tight six months, but as the economy grows we will see changes.

The deal between private equity investor JC Flowers and Kent Reliance has been heralded as the start of a major consolidation programme targeting smaller regional building societies. Does the mutual sector need reform and what would this mean for mortgage lending?

Cornell: Yes, the mutual sector does need some consolidation. You would rather have a smaller number of functioning, well-run mutuals, rather than a lot of mutuals that are teetering on the edge of collapse. You’d rather have building societies that can do their jobs. With the exception of two or three, the building societies are not necessarily doing huge volumes of mortgage lending anyway. So you would rather have a healthy sector, with a few large players rather than a lot of players who are just hanging on by their fingertips.

Lovey: Consolidation has been happening for the last year to 18 months at a higher rate. JC Flowers are opportunists and they may well be right - and I doubt that is the only target in the sights. Montlake: Building society buyups and mergers are a great thing for mortgages because the more people who are out there with the ability to lend, the better. The smaller mutuals that do not have the funds to lend right now might find some money to lend through merg-ers and acquisitions, and that is a good thing for the inter-mediary sector as well.

Montlake: Building society buyups and mergers are a great thing for mortgages because the more people who are out there with the ability to lend, the better. The smaller mutuals that do not have the funds to lend right now might find some money to lend through mergers and acquisitions, and that is a good thing for the intermediary sector as well. Many of these mutuals have been committed to intermediaries for a long time because they know brokers are a good way to distribute their product and they know we offer them good-quality business.

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