First-time buyers look set to bear the brunt of the problems from the fallout of the US sub-prime crisis as lenders tighten up criteria and pull out of the 100 per cent arena.
Recent moves by lenders have seen Accord withdraw its 100 per cent and 100 per cent plus products, Norwich & Peterborough Building Society reduced its maximum loan to value to 90 per cent, where it used to lend up to 100 per cent, and Leeds Building Society now requires anyone taking out a 100 per cent loan to have a guarantor.
Brokers have also signalled that if Northern Rock disappeared from the market it could mean less choice for consumers, particularly in the FTB market where Northern Rock’s Together product has been heralded as an innovative product that could help solve the UK’s affordability problem.
Mortgage Force managing director Rob Clifford says: “I think the Northern Rock Together product has helped seriously to mask the macro economic issues around affordability. That type of product innovation has helped take the pressure off the Government and the need to address supply and demand properly.
“It is ironic that lender innovation has masked the real problem. We have to be careful about criticising lenders for that prod-uct innovation as I think it is a good thing that it has happened.”
Despite positive com-ments from brokers, the 100 per cent plus mortgage market still gets a tough time with a huge amount of criticism from leading public figures.
In last week’s Money Marketing, it was reported that treasury select committee chairman John McFall fired a warning to lenders over practices such as 125 per cent and six-times salary mortgages.
Speaking at a Citizens Advice/Finance and Leasing Association fringe event at the Labour conference last week, McFall said these loans are storing up problems for lenders.
He said he had challenged several chief executives over these issues but found their responses unsatisfactory. He claimed they said it was too risky not to offer these products in case they lost market share.
London & Country mortgage specialist James Cotton says there will always be people who have a go at these products but there is no doubt that the innovation has been very useful.
“If you spoke to a few people who did take out 125 per cent LTV mortgages, I am sure you will find that they were pleased they did so. There is no doubt that these products are a higher risk but people forget they are still underwritten in the same way as other products. People cannot borrow more than they can afford on these products, which is just the same as other mortgages,” adds Cotton.
But with lenders tightening up on their higher LTV lending, Clifford is worried about a reduction in consumer choice. “If some lender ceases to exist or get consolidated or decide to change its lending policy and price for risk, consumer choice does reduce. I am concerned that this will expose the affordability gap that we have been conveniently masked or forgotten about to a great extent over the last 18 months.”
Savills Private Finance director Melanie Bien says that when Norwich & Peterborough Building Society made the move to scrap its 100 per cent lending and reduce it to 90 per cent, it told her that it wanted to move away from riskier lending.
She says: “They were quick to act on what was going on in the market. It is a bit of a shame for FTBs as it will definitely be a lot tougher for them. The ironic thing is that lenders have been producing these products and they’ve all been successful.”
Bien agrees with Clifford’s point that these products have masked the true problem behind affordability and says that it will now throw the spotlight back on them.
The Mortgage Practitioner sole trader Danny Lovey says that everyone is tightening their criteria at the moment. “It is not going to get any better for FTBs. The only thing that can help is if house prices start to fall or if they stagnate for three years. FTBs are definitely the most difficult thing I have to deal with in my job and it’s the part of my job I hate the most when I have to tell FTBs you cannot afford a mortgage.”
Alexander Hall chief operating officer Andy Pratt says the FTB subprime sector in particular will be hurt after several non-conforming lenders pulled out of this market.
He says: “This is more worrying for the cycle of the housing market. The key question is how quickly those lenders look at it and say it is still a valued product but it needs to be priced accordingly rather than just pulling the criteria, which is a kneejerk reaction.”
Pratt adds that if the present situation continues, it will have an effect on the FTB market due to many FTBs having credit issues, often only in areas such as a late payment on a mobile phone contract.
Despite some lenders tightening and withdrawing from the high LTV arena, Cotton points out that the sector will always see some new players making an entrance.
He says: “For people without a deposit trying to get a mortgage it certainly is harder now as choice has shrunk significantly. But in the same week as Northern Rock announced it will be slowing lending down, we saw Abbey come into the market with a new 100 per cent plus product. Consumer demand is there, so that means lenders will not let the market disappear completely.”