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How default lines could hit homeloans

The sovereign debt crisis gripping Europe and the US could hit confid-ence in the UK mortgage market and limit products available to borrowers.

The troubles in Europe are already having an effect on Britain’s mortgage market. Last week, Money Marketing revealed West Bromwich Building Society has postponed the issuance of its planned £410m securitisation due to concerns about euro-zone market conditions.

UK banks have around £2bn exposure to Greek government debt, so direct exposure is not as big a problem as it is for banks in other EU countries. But dealings with other banks on the continent with a higher exposure to Greek debt means UK lenders are not immune to the risk of default, resulting in comp-lications for the UK mort-gage sector and the whole-sale markets that fund it.

John Charcol senior technical manager Ray Boulger says the post-ponement of West Brom’s residential mortgage-backed securitisation means funding conditions could tighten once again.

He says: “The biggest risk to the mortgage market in the short to medium term is contagion when Greece defaults. When there is a situation where a lender announces an RMBS issue and then has to pull it, it suggests there has been a significant deterioration in the market and whole-sale markets are drying up.”

Another factor that could affect all global economies, including the UK, is the threat of a potential US downgrade. Talks between the Republicans and Democrats to raise the ceiling on its debt limit remained in deadlock last week, with senators having until August 2 to reach a compromise or face their country losing its AAA credit rating. Between the Greek crisis and the stalemate on US debt negotiations, Cicero Consulting director and chief corporate counsel Iain Anderson says he cannot see an end to the pressure on the mortgage market.

’There is a knock-on effect for all countries in the housing market but the flipside could be the UK is seen as a relatively good place for money’

He says: “There is a perfect storm going on. We have had this situation in the eurozone for three months and that is going to flow through to the ability to price products in the mortgage market. It is difficult to see any light at the end of the tunnel.”

The Council of Mortgage Lenders believes both crises could affect consumer demand for mortgage finance.

A spokesman says: “International market conditions is an area of uncertainty that is bearing down on consumer confidence.”

Barclays says troubles in the eurozone have caused it to pull a range of products.

The bank’s intermediary channel director David Finlay says: “We have seen what is happening with swap rates on a daily basis. We were planning to launch some products a little while ago and we pulled them to reprice them because of what is happening there.

“I do not believe the current global economic troubles will have an impact on lending volumes in 2012 but I do think it will impact on the range of products we are able to offer customers.”

Bigger banks are likely to be more exposed to the sovereign debt crisis but will also be in a better pos-ition to weather problems than smaller lenders.

Head of mortgage policy at the Building Societies Association Paul Broadhead says: “Because our members do not tend to operate across borders, building societies do not have the exposure to the eurozone that other institutions have but they will always be affected by the prevailing economic conditions.”

Last week, US Treasury bond yields rose above gilt yields, indicating the markets see the UK as a relatively safe bet for bond investors.

Home Funding chief executive Tony Wards says: “There is a knock-on effect for all countries, including the UK, in terms of the housing market and the ability to price products but the flipside could be that we are seen as a relatively good place for money. You have got to place your money somewhere, so we might be a net relative winner at a global level.”

But Precise Mortgages managing director Alan Cleary says it is unlikely the sovereign debt crisis will affect the mortgage market as it is just one of a number of temporary shocks to hit the market in recent years.

He says: “Over the next few years there will be constant issues coming up, not just in the eurozone and the US, but I think it is all temporary.”


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