Jonathan Cornell head of communications, First Action Finance
Jonathan Clark mortgage partner, Chadney Bulgin
Alan Lakey partner, Highclere Financial Services
Last week, Vince Cable was talking about taking action against the banks if they do not meet the lending targets set by Project Merlin, with an increase in taxation to most likely course of action. Do you think the Government should resort to this sort of action if the banks do not increase their lending of their own accord?
Cornell: I don’t think it would be productive really. Project Merlin was simply politicking, it was trying to show a Government that was being tough on banks and it was never going to work because the banks were never going to lend to people who they do not think will pay the money back. You could argue that forcing the banks to lend to people who are not creditworthy is not sensible lending.
It would be great for the banks to lend more but until they have more money to lend they are not going to be able to do that. Once they have paid off the special liquidity scheme there will be a bit more available but until that happens I cannot really see it.
Clark: From what I have heard, the banks are claiming the money is all there but no one is coming and asking for it, which they would say.
Project Merlin covers all bank lending but, from the mortgage side of things, banks have been a bit of a victim of very quiet markets. Property turnover is quite low, so lending is generally down in the last year.
Cable has to do something to encourage lending but it would be a bit harsh to penalise the banks when the market has been at such a low level.
Lakey: I was speaking to a building society manager just the other day and she put the blame squarely on the FSA. In the past, if it felt it was appropriate, the building society could lend up to 10 times income. It was not limited by anything except its own common-sense approach to what was affordable.
Over the past few years, we have gone from profligate lending to a form of rigidity. Unless something fits a very precise template, it is very difficult for a client to get what he or she wants, regardless of whether it is affordable.
I believe it is not necessarily a case of lenders not wanting to lend, although I am sure they are being cautious and are cherrypicking but they are also reacting to pressure from the FSA, which has said ’don’t lend beyond this, don’t do that, take a cautious approach’.
If you accept that the FSA is an arm of Government then Vince Cable needs to have a word in Hector’s ear.
Tesco has recently confirmed its intention to move into the mortgage market and Virgin is eyeing a potential purchase of 600 high-street branches from Lloyds. Will the introduction of these players into the market do much to boost the choice of loans available and rates available to borrowers?
Cornell: I am sure it will. Ultimately, the more suppliers and the greater number of lenders out there, the more choice there is for borrowers. At the moment, the market is dominated by four or five high-street lenders that can more or less pick and choose what level of lending they want.
In the past couple of months, we have seen more competition than at any time in the past three years or so but new entrants should introduce even greater levels of competition.
’The level of SVRs will be fascinating when the base rate does go up because there are more and more people who are effectively mortgage prisoners’
Clark: I am not sure about the rates but I am a firm believer in the more lenders we have and the more competition to shake up the market the better. Too many of the state-owned banks have pretty mediocre products with pretty mediocre rates and they are not dynamic enough. A Branson launch and some more small lenders would be good. They need to come out with some more innovative products but I do not think they will come out and just slash interest rates.
Lakey: It may well keep competitors on their feet interest-rate-wise. I do not believe that either of these organisations will redesign the mortgage, particularly with pressure from the FSA to conform to a narrow template for lending.
For that reason, I do not think we will get any more choice. Perhaps what we will get is people who would not necessarily have applied for a mortgage who may well trust the brand name and it may divert them from some other lenders or even inspire them, when perhaps they may have carried on renting but I don’t think it will be a big push.
The other question is whether they will use intermediaries and I think the answer is almost certainly no.
Which? has accused lenders of squeezing their customers by using standard variable rates that do not accurately reflect the cost of borrowing. Are lenders making excessive profits out of customers who are trapped on uncompetitive SVRs?
Cornell: I think there is a balance. Lenders need to try fund their lending and they cannot borrow at the base rate, they are having to pay savers more than that, they are having to put aside fairly massive amounts of capital on fairly high loan to value lending. I do not think it is simply a matter or saying SVRs are too high.
The level of SVRs will be fascinating to watch when the base rate does go up because there are more and more people who are effectively mortgage prisoners, who will not be able to remortgage. In the past, if your SVR went up, you just remortgaged with another lender.
If your lender puts up the SVR too high, there will be some terrible consequences. I suspect once the base rate goes up, we will see a bit of margin compression.
Clark: Yes, I think they are but there is such a huge difference between the lenders. You have got Cheltenham & Gloucester with an SVR of 2.5 per cent and there are a lot clients stuck on that but there are lot of banks up as high as 6 per cent. There is such a huge variance.
The banks have got a lot of people who are stuck, people with little or no equity and people with less than 25 per cent equity in their property are not able to remortgage away and get a better SVR, so they are stuck.
Lakey: They are doing the very thing the FSA has told us we cannot do, which is crosssubsidise. You may have a client who is paying 0.1 per cent over base and they are losing money on him so they have to gain their money back by charging a higher variable rate.
But to an extent this is a commercial decision and I do not think it is necessarily fair to criticise. Ultimately, market forces dictate. If a lender has poor service or has too high a rate then people will leave.
The problem is that a number of people are stuck with lenders, partly because of property values and partly because self-cert has disappeared. For them, it is unfair but then life is unfair. You can’t please all the people all the time.
Figures from the FSA show repossessions were up by 17 per cent in the first quarter of this year, while the Council of Mortgage lenders’ figures show a 15 per cent increase. Do you expect this to be a temporary blip, or is unaffordability finally catching up with people?
Cornell: Sadly, I don’t think it is a blip, we are going to see more repossessions. Repossessions have been artificially low as lenders have been incredibly forgiving trying to keep people in properties. The pressure that has been on lenders not to repossess, they have been amazingly generous with the forbearance. In any other point in the mortgage market’s history, a lot of people would have been repossessed.
Clark: I would hope it is a temporary blip. From an affordability point of view, nothing has changed with mortgages as rates are flat. The problem is other inflationary pressures. With rising costs of insurance, gas, electricity and food, it is pushing people over the edge. There are a lot of people who have just been hanging in there for the last couple of years and despite the fact that mortgage costs have not really moved at all, it is other inflationary pressures that have pushed them over the edge. I hope it is a blip but it depends on inflation.
Lakey: I don’t think it is a lack of affordability, as interest rates are lower for the majority of people than they have ever been. I think it is a reaction to the economic climate, people losing jobs, people taking three-day weeks rather than lose their jobs. As for being temporary, it is temporary until the economic outlook improves but if we get some interest rate hikes that will make matter worse and we could go into a trough which would take many years to recover from.
I was rather surprised to see the repossession figures as I have not seen many clients in dire straits. It makes me wonder if part of the problem is to do with fact they have taken on additional debt by way of credit cards.
The latest FSA bulletins to mortgage lenders raises concerns about the potential for some buy-to-let mortgages to be ’gamed’ by mortgage brokers looking to use them as a proxy for self-cert residential mortgages. Should there be more scrutiny of these mortgages?
Cornell: I don’t think so. We are seeing a lot more competition in the buy-to-let market, which has got to be good but I do not think the buy-to-let market is particularly lax. I understand where the FSA is coming from.
If someone cannot get a residential mortgage, they might be tempted to pile straight in for a buy to let. But if someone who does not own a property, if they wanted to do a buy to let, they would need to prove their income, so it is no different from a residential mortgage. Lenders are careful with who they lend to, so I very much doubt there are people getting buy-to-let mortgages instead of residential mortgages.
Clark: That has been a widespread concern since the buy-to-let market has come back. Obviously, one fear was that with the demise of the self-cert mortgage, brokers would abuse buy to let for owneroccupiers to use them. Most buy-to-let mortgages are not too concerned about your income. As long as have a minimum income of £25,000 to £30,000, they will lend to you based purely on the rental income.
But lenders have been policing this fairly carefully, I have not come across any examples of that. We are still generally limited to a 25 per cent deposit so it will not be very widespread but you are always going to get some brokers who will try a little angle.
Lakey: Funnily enough, I had a client ask me the other day if it was possible. I said theoretically it is but, in reality, because of the way the figures stack up, not many people would be able to qualify.
To get anything half decent you need 15 per cent deposit and the fees are horrendous – 3.5 per cent for The Mortage Works are their cheapest rates.
I’ am sure there are one or two firms that have cottoned on the idea, have thought this is a good ruse and are maybe making some hay.
There are safeguards though. To some extent, it should be obvious to the solicitor involved and normally the solicitor would act for the lender as well.
Anything can be abused but I suspect there are very few cases out there.