Ray Boulger's Blog

More on the MMR - Non Advised sales and Equity Withdrawal

Mon, 09 Nov 2009 14:42:00 +0000

Below is my November column for Money Marketing, published last week: Lobbying from the AMI and others helped persuade the FSA in its Mortgage Market Review (MMR) not to adopt some of the uninformed suggestions from certain politicians. Thus the MMR does not propose loan to value or loan to income caps. Some other proposals are very sensible, including the new names for different types of advised and non-advised sales, and the FSA’s belated recognition that individuals giving advice or information to borrowers should be registered at the FSA as approved persons. However, I suspect there is a catch 22 situation in the proposals for non advised sales. On the face the new proposal to use the term “non advised sale” should be clear to borrowers, but then so should the current term - “information only.” The more questions a customer is asked before a “non-advised sale” takes place the more likely it is that they will think they have had advice, whatever they are told regarding the type of sale. With the MMR proposing more questions should be asked to establish affordability, including on non advised sales, it may be necessary to go further to make sure customers understand when they have not had advice. The MMR’s emphasis on oral information is sensible but will be difficult to monitor. Maybe on all non-advised sales customers should sign a short one paragraph statement confirming they understand they have not advice and the implications in respect of access to the Ombudsman. On the negative side two proposals in the MMR which need to be challenged are the banning of self cert and fast track and restrictions on equity withdrawal. The former appears to be based largely on a failure by the FSA to fully understand the difference between self cert and fast track. The justification for the later is that “by (2007) home purchase equity withdrawal replaced home purchase as the main purpose of mortgage borrowing” and that “39% of all mortgages sold in 2007 were advanced for this purpose.” I couldn’t work out how the FSA got this 39% figure and wondered if “home purchase equity withdrawal” was something different to “equity withdrawal.” I asked the CML if it understood this figure but it was also puzzled and consequently it asked the FSA for clarification. The FSA response was that including the words “home purchase” was a “drafting error” and that 39% was based on Bank of England figures of £42bn for housing equity withdrawal (HEW) and £108bn for net lending in 2007. Thus the justification for restricting equity withdrawal is based on the out of date figures of a single year. I can’t imagine why the FSA didn’t use the latest figures, i.e. 2008. Surely it can’t be because the latest figures don’t support its hypothesis! In 2008 HEW was negative at minus £9.1bn, with net lending at £40bn, thus indicating that the market self corrects, with no need for regulatory intervention. Or maybe it simply couldn’t work out what percentage of sales a negative figure was. Lies, damn lies and statistics!

QE extended by £25bn but it is Savers who Bring Relief To Mortgage Borrowers

Thu, 05 Nov 2009 15:33:00 +0000

With today’s Bank Rate decision a forgone conclusion, the only question we had to wait until midday to get the answer to was whether the MPC would extend the Quantitative Easing (QE) programme and, if so, by how much. The committee will have had sight of the draft Quarterly Inflation Report, to be published in 6 days time, and so today’s decision to extend the QE programme by £25bn suggests there is little, if anything, in the Report in the way of optimism to counterbalance the depressing third quarter GDP figures showing that the UK has now been in a recession for the longest period since records began, and on the watch of the man who claimed he had abolished boom and bust! However, the fact that the intention is to take 3 months to spend this extra £25bn, compared to the £50bn spent in the last 3 months, indicates that the MPC is at least less bearish on the outlook for the economy than it was 3 months ago. Fortunately the picture for mortgage borrowers looks a little brighter, despite Libor rates having edged up over the last month, with 3m Libor up from 0.55% to 0.60%, and swap rates having risen quite sharply. For example 2 year swaps are 0.30% higher at 2.07% and 5 year swaps are 0.35% up at 3.45%. Despite these significant increases in swap rates both fixed and tracker mortgage rates have fallen over the last month. Prior to the credit crunch increases in wholesale rates on this scale would certainly have resulted in the cost of fixed rate mortgages rising. The two reasons why they have not are that savings rates are now funding a much higher proportion of mortgage lending and competition in the mortgage market has increased considerably. Taking the 5 year savings bond market as an example, according to Moneyfacts 7 banks or building societies are offering a rate of 5% or over, with the top rate being 5.35% from Skipton B S. Although competition in this market has increased to the extent that the number of banks or building societies offering over 5% has grown, the top rate available has remained in the very narrow range of 5.3-5.4% for several months. The relative stability of savings rates has helped to avoid mortgage rates increasing. Couple this with the significant increase in competition over the last month from a resurgent Northern Rock, which has been cutting some rates twice a week. The impact of that competition has been to force other active lenders to cut their margins on new lending or miss their lending targets. Some have chosen to offer more rates at the higher LTVs rather than compete too aggressively for lower LTV business and so borrowers across the LTV spectrum have benefitted. Northern Rock’s third quarter statement yesterday said that it’s gross lending in the first 9 months of this year was £2.3bn. Now terms have been agreed with the EU it wants to get as close to £4bn as it can for 2009 lending and its 2010 target is £9bn. The deal agreed with the EU is that it will not have any mortgage products in the Moneyfacts top 3 for the relevant category but this does not come into force until January next year and its old limit of 2.5% of total gross lending is effectively redundant. Thus it has a window until the end of the year to be as competitive as it needs to be to hit its targets. This is having more impact on competition in the mortgage market than is likely from the forced sale of some Lloyds Banking Group and RBS branches, and at a time when the extra competition is badly needed. Northern Rock’s 4.99% 5 year (to 31/12/14) flexible fixed rate up to 70% LTV looks attractive for borrowers wanting the security of a fixed rate but despite the cost of 2 year fixes also falling, short term fixes such as these offer few attractions compared to the significantly cheaper rates available on the best trackers, with lifetime trackers in particular looking attractive.

Nationwide's Real House Price Index rises by only 0.1% in October

Fri, 30 Oct 2009 22:36:00 +0000

Nationwide’s “Real” House price Index increased by 0.1% in October, compared to the more widely reported 0.4% seasonally adjusted rise. This is the smallest monthly rise since the market bottomed out in February but nevertheless takes the run of unbroken monthly increases to 8. October marks a sharp slowdown in the rate of increase after the previous 5 months when prices rose between 0.9% and 1.6% every month. The seasonally adjusted figures for November and December will total about 1% more than the real figures, with most of this adjustment taking place in December. Although it is always dangerous to read too much into a single month’s figures the slowdown in the rate of increase shown by the October figures is healthy as monthly increases on the scale of those seen since March are clearly unsustainable. The Bank of England in particular will be pleased to see the rate of increase in house prices slowing because if prices were to continue rising at their recent pace the possibility of an earlier than expected increase in Bank Rate would have had to be considered and any such increase would be very harmful for the rest of the economy, which is likely to need support from low interest rates for a considerable time. Although mortgage supply is still constrained conditions in the mortgage market have continued to improve over the last month, stimulated by some aggressive pricing from Northern Rock, which has pushed several other lenders to respond to protect their market share. This increased competition has even extended to the higher LTVs, with Nationwide in particular improving its proposition in this sector. I don't expect the recent FSA proposals in the Mortgage Market Review (MMR) to have a significant impact on the market in the short term for two main reasons: The mortgage market has already tightened up considerably as a result of limited funding and so much of what the FSA is proposing is already a fact of life. The FSA is looking ahead to when more funding is available and lenders might become less restrictive.Some aspects of the FSA's proposals will almost certainly be amended because the MMR is a discussion document and there is no point the FSA consulting on it unless it is prepared to reassess its original proposals to take account of the views expressed. (I recognise that the Government sometimes completely ignores responses to a consultation process, such as with the introduction of HIPs, but the FSA has a much better record on taking account of responses to its consultations) Nationwide's Chief Economist, Martin Gahbauer, points out that there is a strong correlation between consumers' future house price expectations, as measured by Nationwide's monthly Consumer Confidence Survey, and actual house price movements. The latest figures from this index have continued the recent trend showing more confidence returning to the housing market and twice as many people now expect house prices to rise over the next 6 months compared to those expecting a fall. This supports my expectation that house prices on a national basis will continue to rise in the short term, but significant regional variations are likely to continue. After a surprisingly strong recovery this year the rate of increase is likely to continue at a slower pace but as long as a majority of people expect prices to rise there is a clear incentive for those people who want to buy to do so sooner rather than later, providing of course they can get adequate finance. The following table shows the recent trends: The Nationwide House Price Index – The Real Figures and the Seasonally Adjusted OnesMonthAverage price (£)Real ChangeSeasonally Adjusted ChangeDifference2008Jan180,473- 0.9%- 0.6%+ 0.3% Feb179,358- 0.6%- 0.9%- 0.3% Mar179,110- 0.1%- 1.2%- 1.1% Apr178,555- 0.3%- 1.2%- 0.9% May173,583- 2.8%- 3.0%- 0.2% Jun172,415- 0.7%- 1.3%- 0.6% Jul169,316- 1.8%- 2.0%- 0.2% Aug164,654- 2.8%- 2.0%+ 0.8% Sept161,797- 1.7%- 1.8%- 0.1% Oct158,872- 1.8%- 1.5%+ 0.3% Nov158,442- 0.3%unchanged+ 0.3% Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.1%+ 0.6% Feb147,746- 1.8%- 1.7%+ 0.1% Mar150,946+ 2.2%+ 1.2%- 1.0% Apr151,861+ 0.6% - 0.3%- 0.9% May154,016+ 1.4%+ 1.4%nil Jun156,442+ 1.6%+ 1.0%- 0.6% Jul158,871+ 1.6%+ 1.4%- 0.2% Aug160,224+ 0.9%+ 1.4%+ 0.5% Sept161,816+ 1.0%+ 0.9% - 0.1% Oct162,038+ 0.1%+ 0.4%+ 0.3% Price ChangesOverReal ChangesSeasonally adjusted changesThe last year+ 2.0%2009+ 5.9%+ 4.6%The last 6 months+ 6.7%+ 6.7%The last 3 months+ 2.0%+ 2.8%The last month+ 0.1%+ 0.4%Fall from peak - 12.9%- 13.2%Increase from 2009 trough+ 9.7%+ 7.7%

Barclays acquires Standard Life Bank at 22.9% discount to NAV

Mon, 26 Oct 2009 15:01:00 +0000

The announcement this afternoon that Barclays are acquiring Standard Life Bank is sad news for consumers, not because of anything negative about Barclays but because it means that one of the dwindling number of brands still active in the mortgage market will no doubt disappear next year when the sale is concluded, or soon afterwards. Standard Life Bank is one of the few lenders still offering mortgages with fixed rates for longer than 5 years and is also one of a relatively small number of lenders still in the Buy-to-Let market. It is still a young bank, having been launched only 11 years ago, but has been innovative, with one of its initial products being a 25 year capped rate mortgage. However, its rates have been uncompetitive for some time, which is an indication it currently has little appetite to lend. In the current market the stronger banks like Barclays are in prime position to pick up assets cheaply and that is certainly what Barclays appears to have done here. It is paying £226m for the profitable Standard Life Bank, based on its estimated £293m of tangible net assets, i.e. a 22.9% discount to net asset value. With outstanding mortgage balances of £8.8bn Standard Life Bank only has about 0.7% of total UK residential mortgage balances but its average indexed LTV of 48% indicates a good quality book. A better assessment of quality could be made if a breakdown of the proportion of mortgages in different LTV bands was provided, but even though Standard Life offered mortgages to 100% LTV it only offered these to a fairly limited range of professionals and so I would expect even its high LTV book to be of good quality.

My take on the rest of the MMR proposals

Wed, 21 Oct 2009 22:45:00 +0100

Following on from my blog post on Monday on the MMR I note that less than 24 hours after post the FSA have amended the figure I queried for the increase in property prices over the 10 years to the onset of the credit crunch from 300% to 200%. As foreshadowed in that blog I will now comment on aspects of the MMR other than self cert and fast track. In the foreword to the MMR the FSA says “We recognise that the market has worked well for many consumers: the vast majority of mortgage borrowers will come through this recession meeting their mortgage payments.” This should be born in mind when assessing the changes the FSA is proposing. Although regulation obviously needs to address issues at the lowest common denominator level, that should not be at the expense of an unnecessarily negative impact on the “vast majority” of mortgage borrowers by piling extra costs on firms, which inevitably will be passed on to consumers. It also should not prevent a consenting borrower from entering into a contract with a consenting lender, subject to appropriate safeguards. Defining what those safeguards should be is a challenge but a good starting point is the requirement in The Financial Services and Markets Act (FISMA) that the FSA should have reference to the “general principle that consumers should take responsibility for their decisions.” They can only be expected to do this if the benefits and risks of any particular mortgage are explained clearly to them and it is encouraging that the FSA now recognises that consumers do not use the KFI as they intended, i.e. for shopping around, but mainly rely on the oral advice or information they receive. Most lenders already base the maximum amount they will lend on an affordability calculation, sometimes using actual expenditure as disclosed by the borrower and information from the credit reference agency and sometimes using averages from the National Audit Office. The FSA wants to go much further and make the mortgage application process far more intrusive by requiring borrowers to disclose not only committed expenditure (which lenders generally already require) but also discretionary expenditure on “food and drinks, alcohol and tobacco, clothing and footwear, household goods and services, health and personal care, transport, recreation, culture, restaurants and hotels, holidays and other miscellaneous goods and services.” Going through a detailed budget planner with some clients, particularly first time buyers, can be a helpful exercise for the client as well as the adviser, but for others a regulatory requirement to do so is insulting. Advisers and lenders should be given discretion as to how much of this detail is necessary, depending on the client’s status. In any case most people don’t say that my discretionary expenditure is £x and so I have £y left for my mortgage. They look at how much their mortgage and other committed expenditure is each month and then work out how much is left to spend on non essentials or save. Furthermore, rather than trying to micro manage people’s budgets, the interest rate assumed for the affordability calculation is much more important. The FSA is prescribing 2% as the increase in rates to use for affordability purposes but the danger of this is that by specifying a rate some consumers will rely on it for their own budgeting purposes. For anyone taking out a tracker today a 2% increase is too low a rate to use, whereas for someone taking a 10 year fix it would be fair to use the actual rate they are paying. The FSA is also proposing that all affordability calculations should be based on a 25 year repayment mortgage. Why? With the retirement age increasing it will be perfectly feasible for people to take out a mortgage for a longer term than was sensible a few years ago. If a 25 year old with a retirement age of 68 wants a 40 year mortgage to keep initial costs down what is the problem? The FSA has recognised that many borrowers whose mortgage is processed on a non-advised basis think they have had advice and also that some sales recorded by firms as non-advised are really advised. It accepts that some consumers do not want advice and it would be wrong to force them to have advice. It therefore proposes retaining both advised and non-advised sales but enhancing “the protections consumers have in a non-advised sale by imposing a basic standardised affordability and appropriateness test.” This seems sensible but I worry that if the information on discretionary expenditure demanded from clients for an advised sale is as intrusive as the FSA proposes more clients will choose the non-advised route. I suspect this is the exact opposite of what the FSA would like. Once a borrower has been asked more questions about affordability he/she will be even more likely than now to think they are getting advice to take a particular mortgage. Most lenders aren't keen to offer advice to their direct customers because of the more onerous regulatory and staff training requirements and so any extra questions they have to ask the customer will present a challenge to lenders (and those brokers who do primarily non-advised sales) to make sure their customer knows they are not giving advice. The proposal to require all mortgage advisers to become approved persons with individual broker registration is very sensible and should enable the FSA to deal much more quickly with the minority of rogue elements in our profession. The only surprising thing is that the FSA choose not to do this from day 1, in line with the policy of its non statutory predecessor, the Mortgage Code Compliance Board.Gordon Brown’s proposal early this year to cap LTVs at 90% was naïve and this review very sensibly recognises that LTV caps would be inappropriate. Affordability is the key issue and proper risk based pricing is required for higher risk mortgages, not a ban. Logically if mortgages above 90% LTV were banned all unsecured lending would have to be banned as well because that type of lending is obviously even riskier! Likewise, once it is accepted that affordability based lending is appropriate a loan to income cap would have been superfluous.Some of the changes the FSA is proposing are no doubt partly based on its re-assessment of the role of the consumer. Previously it assumed consumers would act rationally to protect their own interests but now it believes consumers have "behavioural biases.” Because the loan is a means to an end, for example a home or a car, they fail to focus on the details of the loan and hence the regulator needs to become "more interventionist to help protect consumers from themselves".It also suggests that consumers need "re-educating away from the idea that renting is bad and home ownership good, and away from seeing property as an investment." I suspect it will struggle with that one!The FSA suggests its scope should be extended to regulate second charge mortgages and buy-to-let (BTL) mortgages. The former is long overdue and it is almost unbelievable that the reason The Treasury originally decided that the FSA should not regulate second charge loans was that “your home is not normally at risk with a second charge loan.” Bringing BTL mortgages under the FSA umbrella will pose many challenges and when The Treasury consults on this shortly I expect the responses to be much more mixed than those which will be received on second charge lending. BTL is an investment and so should the regulation be as an investment or as a mortgage, or both? There is a huge difference between the amateur landlord with one or a few properties and the professional with perhaps over 100. If one is going to regulate mortgages for the landlord with, say, 100 residential properties and also a couple of shops or office blocks, why regulate one but not the other? I think it may be necessary to find a way of regulating BTL mortgages for the amateur landlord but not the professional, which then presents the problem of where to draw the dividing line. The FSA says that “We are not seeking to pre-empt the outcomes of the debate: the aim is to stimulate a wide-ranging discussion.” Unlike the Government, whose so called consultation papers have often been a sham (just think of HIPs) the FSA has demonstrated a willingness to listen to responses to its consultation documents. For example the final version of MCOB had some significant changes from the original and more recently the huge response from brokers, encouraged by AMI, to the massive increase in FSA fees originally proposed for brokers for this year resulted in much revised figures with only small increases. Therefore I would encourage every reader to engage with the FSA and answer the questions summarised in Annex 1 by the deadline of 30 January. Why not also encourage clients who think they will be adversely affected by any of these proposals to also respond to those questions which concern them. The more responses to this discussion paper the FSA gets the more influence they will collectively have on its final rules.

Some politicians never learn

Tue, 20 Oct 2009 22:14:00 +0100

Mortgage Strategy is reporting a call from Vince Cable for ‘stakeholder’ style mortgages to be introduced. He starts off well by saying: “With such a complex mortgage market already in existence highly prescriptive rules for mortgage affordability are not appropriate.” This is spot on but he then spoils it by saying “It is critical that a simple and safe ‘stakeholder’ style mortgage as the Liberal Democrats have proposed is introduced.” Maybe Mr Cable has a short memory or maybe he is just not very familiar with the mortgage market. Either way if he had done a little research before calling for “stakeholder” style mortgages he would have discovered, or reminded himself, that the Government launched just such a scheme along these lines at the end of the last decade. They were called “CAT Standard” mortgages and bombed in a big way. Nationwide and HSBC were the only two lenders to embrace the CAT Standard and all their mortgages complied with it. Other lenders either ignored CAT Standards or, if they wanted to be politically correct, launched a token product. After a while Nationwide very cleverly found a way around the rules banning ERCs on variable rate CAT mortgages by adding a very high, and hence almost worthless, cap to its trackers, which allowed it to include an ERC on these mortgages. CAT Standard mortgages subsequently disappeared from the market for the very simple reason that the costs for lenders of meeting the CAT criteria meant they either had to price such mortgages at an uncompetitive level or take a margin hit. Consequently sales of the lone CAT Standard mortgage offered by some lenders were abysmally low because other products in their ranges offered better value for most people. In due course Nationwide and HSBC aborted CAT mortgages to avoid being at a competitive disadvantage. All of the criteria required to meet the CAT standards had merit in themselves but few borrowers needed all the features and that was the issue. Most borrowers who bought a CAT Standard mortgage were effectively paying for every CAT feature because each feature had a cost and it was all or nothing. Thus nearly every borrower who bought a CAT mortgage paid over the odds. Why anyway is Mr Cable trying to reinvent the wheel? Even in the current market borrowers who want a simple mortgage have a choice of several - they are called lifetime trackers, and are offered by HSBC, Woolwich, First Direct, Abbey and several smaller lenders. Many of these lifetime trackers offer excellent value, including some on an offset basis. However, no doubt Mr Cable would not class an offset mortgage as simple and would therefore dismiss it, even if it was offered at a cheaper rate than its non offset equivalent, as was the case with Woolwich lifetime trackers as recently as August this year. If Mr Cable ever has further thoughts about calling for a new mortgage product he should consult a good independent mortgage broker first to check whether the market is ahead of him.

The FSA fails to understand the mortgage market

Mon, 19 Oct 2009 23:51:00 +0100

The FSA’s Mortgage Market Review (MMR) was published today and although you are not at risk of getting autism from this MMR there will be a significant amount of consumer detriment if the report’s proposals to ban self certification mortgages are adopted. Out of the UK’s 10m residential mortgages about 1m, or 10%, were arranged on a self cert basis and a large proportion of this sizable minority of borrowers are at serious risk of being denied the opportunity to ever get another mortgage, even when conditions in the mortgage market improve. Thus they will be condemned by the FSA to stay in their current home when they want to move, unless they are prepared to sell up and rent. They will also be denied the opportunity to remortgage and thus be left to the tender mercies of their current lender. For many who don’t want to move this will not be a problem in the short term as many will revert to a reasonable variable rate when their initial deal finishes. However, when the time comes that they want to switch to a fixed rate they will only be able to do so if their current lenders is prepared to offer them a product transfer rate. Many self cert borrowers will have their mortgage with a lender which has exited the market and will have no choice but to stay on their revert to rate. If they are not able to switch to a fixed rate when they want to, purely because of the FSA’s ban on self cert mortgages, this obviously increases the risk that their mortgage will become unaffordable if interest rates increase too steeply. If this results is them going into arrears and, worse still, being repossessed, the FSA will be culpable. One of the FSA’s statutory duties is to protect consumers, not increase the risk that their mortgage becomes unaffordable! Part of this full frontal attack on self cert mortgages, which is a perfectly valid product for some borrowers, seems to be based on a major misunderstanding by the FSA of “income non-verified” mortgages. In the regular returns the FSA requires lenders to submit there is a requirement to specify the proportion of mortgages they sold which were “income non-verified.” In asking for the information on this basis, rather than asking for the proportion of self cert mortgages and the proportion of mortgages which were fast tracked, I can only assume that the FSA did not understand the difference between the two. If it did surely it would have asked for two separate figures. In the spirit of helpfulness I would advise the FSA that self cert is a product where the lender guarantees not to ask for proof of income, whereas fast track is a process where on a mainstream mortgage the lender exercises their right not to ask for the normal paper proofs because they determine that the mortgage is low risk on the basis it has a low LTV, a loan size below a certain level and the applicant’s credit score was good. Lenders may not (yet) be able to get applicants’ DNA from the credit reference agencies but they can and do get an awful lot of financial and other information. It is on this basis that ID verification can often be done electronically and sufficient information obtained for the lender to safely cut down on the paper proofs required. If the credit score is not very useful in making this decision why do lenders, the FSA and the rating agencies all regard it as being so important? The FSA really can’t have it both ways – either the credit score is a valid tool in assessing mortgage applications or it is not. If it is but the same paper proofs are required for an applicant with a high score as someone with a low score what purpose is it achieving? On the Today programme this morning Hector Sants, Chief Executive of the FSA, said: “in the boom times self cert mortgages were around half of those offered.” This claim is complete nonsense and it is very worrying that the FSA is trying to set policy on the basis of such a serious misunderstanding. It is true that about 50% of mortgages were income non verified, but only about 10% were self cert. The arrears record on fast track mortgages is generally better than average, which is exactly what one would expect if the system is working properly, because they are the mortgages the lender has identified as low risk. This compares with self cert mortgage having an above average arrears record, which again is exactly what one would expect. This extra risk needs to be priced properly, which wasn’t always done in the run up to the credit crunch, but with correct risk based pricing self cert mortgages are a perfectly valid option for borrowers. More on the MMR tomorrow, but meanwhile I will leave you with this thought. Over 50% of the population don’t understand percentages but I was shocked to discover that this 50% includes the senior management at the FSA. No doubt the MMR will have be checked and double checked before being signed off for release but on p.47, section 4.47, it says that ”property values increased by almost 300% in the decade before the onset of the financial crisis.” This didn’t look right to me and so I checked it out with the Nationwide house price index. Sure enough from Q3 in 1997 to Q3 in 2007 this reported an increase of 203%. I suspect the wise heads at the FSA thought that a 3 fold rise in property prices was equivalent to a 300% increase. Oh dear!

Nationwide Real House Price Index now up 7 consecutive months

Fri, 09 Oct 2009 19:56:00 +0100

Nationwide’s “Real” House price Index increased by 0.9% in September, almost the same as August’s 1.0% rise. The seasonally adjusted figure for September was very similar at + 0.9%, leaving the cumulative difference between these two figures for the first 9 months of this year at 1.6% (see table below). Both figures must come in line at the end of any 12 month period and the seasonally adjusted figure next month is likely to be adjusted upwards by 0.3-0.5% from the real figure. This is the seventh consecutive month the real house price index has increased since bottoming out in February October tends to be one of the peak months for housing transactions and if that trend is repeated this year it will be a good test for the market to see if the index continues rising on greater activity. The longer prices keep rising the more people who have been unable to sell at the lower prices due to having insufficient equity for the deposit on a new property will be able to move. This will help levels of activity but most of these sellers will also be buyers and so the impact on prices of these extra properties coming on the market is likely be modest. The table at the end of this post is self explanatory and, based on the Nationwide House Price Index, I now expect house prices to record an increase of 7.5% in 2009, rather than falling 5% as I predicted at the end of last year. I also expect prices to keep rising next year, but at a slower pace. In particular there is an obvious incentive for buyers in the £125,001 - £175,000 range to buy this year in order to avoid paying stamp duty land tax. Although the impact of this is unlikely to be large there will be some purchases this year which otherwise would not have taken place until next year. Although mortgage supply is still constrained, especially at the higher LTVs, this week we have at last started to see some real competition from lenders, albeit primarily for lower LTV business. Woolwich, Northern Rock, Abbey, Alliance & Leicester, Principality and Coventry have all announced cheaper deals and Northern Rock has today upped its game further with the announcement of 3 and 4 year fixed rate intermediary exclusives up to 70% LTV from Monday. The 4.89% fixed rate to 31/12/13 is market leading and the 4.39% fix to 31/12/12 is extremely competitive. Cheaper mortgage rates should help to sustain the housing market, although if house prices continue rising at the current rate the Bank of England will start to get worried. This activity in the mortgage market has been encouraged by 3 month Libor stabilising just above Bank Rate at 0.55% and swap rates continuing to fall sharply following the MPC’s decision in August to extend Quantitative Easing by £50bn. 2 year swaps hit a new all time low of 1.75% this week and 5 year swaps closed today at 3.16%, compared to 3.75% the day before the August MPC meeting. The following table gives a clear picture of the recent trends: The Nationwide House Price Index – The Real Figures and the Seasonally Adjusted OnesMonthAverage price (£)Real ChangeSeasonally Adjusted ChangeDifference2008Jan180,473- 0.9%- 0.6%+ 0.3% Feb179,358- 0.6%- 0.9%- 0.3% Mar179,110- 0.1%- 1.2%- 1.1% Apr178,555- 0.3%- 1.2%- 0.9% May173,583- 2.8%- 3.0%+ 0.2% Jun172,415- 0.7%- 1.3%- 0.6% Jul169,316- 1.8%- 2.0%- 0.2% Aug164,654- 2.8%- 2.0%+ 0.8% Sept161,797- 1.7%- 1.8%- 0.1% Oct158,872- 1.8%- 1.4%+ 0.4% Nov158,442- 0.3%- 0.1%+ 0.1% Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.1%+ 0.6% Feb147,746- 1.8%- 1.8%nil Mar150,946+ 2.2%+ 1.2%- 1.0% Apr151,861+ 0.6% - 0.3%- 0.9% May154,016+ 1.4%+ 1.3%- 0.1% Jun156,442+ 1.6%+ 1.0%- 0.6% Jul158,871+ 1.6%+ 1.4%- 0.2% Aug160,224+ 0.9%+ 1.4%+ 0.5%Sept161,816+ 1.0%+ 0.9% - 0.1% Price ChangesOverReal ChangesSeasonally adjusted changesThe last yearNilNil2009+ 5.7%+ 4.1%The last 6 months+ 7.2%+ 5.9%The last 3 months+ 3.4%+ 3.7%The last month+ 1.0%+ 0.9%

Update on Northern Rock's withdrawal from Lifetime mortgage market

Tue, 06 Oct 2009 13:11:00 +0100

On the Mortgage Strategy web site a spokeswoman for Northern Rock is quoted as saying: "Northern Rock regularly review its products and services to make sure they are meeting customer needs. "Lifetime mortgages in particular have seen little consumer demand and are no longer seen to be part of our core product range." She says that the decision was based on volumes of applications. But she adds: "Lenders also have to take into account what is happening with their peers and so other lenders withdrawing from the sector probably would have been a factor in the decision." Why can’t Northern Rock be more honest about the reasons for pulling out of the lifetime mortgage market. Other lenders who have pulled out of this market recently have stated that it is due to funding difficulties. Why would Northern Rock be any different? The final comment from the Northern Rock spokeswoman gives the game away. You don’t have to be a rocket scientist to work out that other lenders withdrawing from the sector would increase demand, not reduce it. By saying “other lenders withdrawing from the sector probably would have been a factor in the decision” what Northern Rock is really saying is that it doesn’t want to be one of a smaller number of lenders still offering lifetime mortgages. That is nothing to be ashamed or defensive about. It is just a realistic assessment of the situation we are in.

The Equity Release market takes another hit from lack of funding

Tue, 06 Oct 2009 10:36:00 +0100

In the latest blow to the Equity Release market Northern Rock has announced its withdrawal from that market, following on closely from the recent withdrawals of Coventry and Saffron. Northern Rock was one of the first lenders to enter this market and at one time was one of the top two lenders in this category. Furthermore, it was the only lender which offered a regular guaranteed monthly drawdown for life. Voting is now taking place for the Equity Release Awards, with the winners being announced at a lunch on 13th November. With ongoing serious funding constraints for the long term end of the market having now having forced several lenders to withdraw from their lifetime mortgage range there must be a serious danger that by 13th November some of the winners will no longer be offering Lifetime mortgages. This won’t be a reason to not offer an award to any of these companies if they win as the awards are based on achievements over the previous year. However, it will be a stark reminder that we are a long way from mortgage funding returning to normal. And this just a few days after the speech from MPC member David Miles on 30th September explaining that a key objective of Quantitative Easing (QE) was to reduce the cost of long term borrowing. He said the reduction in corporate bond spreads has “…helped to encourage increasing gross and net corporate bond issuance.” Despite this, if the success of QE is to be measured on David’s suggested measure of reducing the cost of long term funding it has so far proved spectacularly unsuccessful as far as funding for this longest of all long term mortgage markets is concerned!

Northern Rock significantly improves to its mortgages

Mon, 05 Oct 2009 19:30:00 +0100

Following on quickly from the significant improvement (reported in the previous blog post) to Woolwich’s lifetime tracker rate Northern Rock are also getting in on the act with several good improvements to its product range from tomorrow. Northern Rock is increasing the maximum LTV to qualify for its best rate from 65% to 70%, reducing its rates and also cutting the £995 arrangement fee for all residential purchases (but not remortgages) to £595. The cheapest 2 year (to 31/10/11) fix for purchases comes down by 0.34% from 4.09% to 3.75%. However, the rate to 75% is only being reduced by 0.16% to 4.55%. Thus the gap between the 70% and 75% rates is now 0.64%, which seems excessive for such a small LTV difference. It is also excellent news to see a 0.5% reduction in its 2 year Buy to Let (BTL) fixed rates. The rate to 60% LTV is down to 5.49% and the rate to 70% to 6.09%, both with an unchanged 2.5% fee. With so little competition in the BTL market it is particularly encouraging for that market to see such substantial reductions from Northern Rock, coupled with the improvements across the board to BTL rates announced by The Mortgage Works (a Nationwide subsidiary) from the end of last week.

Brilliant tracker News from Woolwich

Mon, 05 Oct 2009 15:03:00 +0100

Woolwich's decision to cut, from tomorrow, its lifetime tracker rate for LTVs up to 70% by 0.45% to Bank Rate + 2.29% and also reduce the ERC, which is 1%, period from 3 years to 2 is excellent news for the tracker market and propels Woolwich to the top of the tracker best buys tables for LTVs over 60% and up to 70%. It also makes 2 – 5 year trackers up to 70% LTV largely redundant as this lifetime tracker is cheaper than shorter term deals.

The old relationship between Libor, swap rates and mortgage rates has broken down

Fri, 25 Sep 2009 18:36:00 +0100

2 years ago few people had heard of Libor, the London Interbank Offered Rate, let alone knew what it was. Most people still won’t be able to define Libor but as a result of the credit crunch many people will at least be familiar with the term, as mainstream news bulletins took to reporting daily changes in 3 month Libor after Lehman’s bankruptcy. The definition used for the calculation of Libor for the purposes of any Libor linked product is the British Bankers’ Association (BBA) fixing of Libor at 11.00.a.m. each day, based on the average of the rates at which inter-bank deposits are offered to the contributing banks for various terms and in all the major currencies. Not all of the contributing banks provide rates for every currency. Libor, particularly 3m Libor, is a widely used benchmark for short-term interest rates and, as outlined above, is in theory is the rate of interest at which prime banks borrow funds from each other for terms from overnight to 1 year. However, over the past year it became known as the rate at which banks don’t lend to each other! All of the contributing banks are major banks and prior to the credit crunch the rates supplied on any one day by these banks would be similar. However, the lack of trust in even major banks after Lehman’s collapse resulted in much wider variations in the rates at which even these banks could borrow from one another. Questions were even asked as to whether some of the banks were massaging the rates supplied to the BBA to avoid admitting the real rates they were being quoted to borrow from their peers. Readers will be most familiar with the Sterling 3m Libor rate, which is not only the Libor rate most commonly quoted but also the rate used for nearly all mortgages which track Libor. A mortgage linked to 3m Libor is in effect a serious of 3 month fixed rates, with the rate reset at the beginning of each 3 month period. Because most tracker mortgages are linked to Bank Rate rather than Libor, whereas the funds lenders borrow in the money markets will normally linked to Libor, as far as their mortgage lending is concerned the important point for lenders is not the actual rate of Libor but the spread between Bank Rate and Libor, particularly 3 month Libor. Movements in 3m Libor anticipate Bank Rate changes expected by the market and prior to the credit crunch 3m Libor averaged about 0.16% above Bank Rate. This margin rocketed to well over 1% at times over the last year but 3m Libor has today fallen back to only 0.05% above Bank Rate, which is a good indication that conditions in the money market are improving. However, much of the money borrowed by banks and building societies to support their mortgage lending is not borrowed for just the short Libor term but by way of a Floating Rate Note (FRN), a Residential Mortgage Backed Security (RMBS) or a Covered Bond for a longer period, typically 5 – 15 years, with the interest rate set for the whole term at a fixed margin above or below Libor. The actual margin depends on market conditions, the status of the borrower and, for mortgage backed securities and covered bonds, the quality of the security offered. All three markets closed for new issues following Lehman’s bankruptcy and the FRN and RMBS markets have only just reopened. Over the last few weeks Barclays, Nationwide and Lloyds have all raised money by issuing sterling senior unsecured FRNs for 10-12 years. Nationwide, for example, raised £700m for 10 years, but had to pay 1.85% over 3m Libor, compared to 0.1% over Libor last time it raised money in this way, which was in 2005 This is a clear indication of how much the market has changed, despite Libor rates above Bank Rate returning to pre credit crunch levels. Lloyds had to concede an even bigger margin over Libor, which says a lot for the trust the market has in our Government’s commitment to playing fair with those institutions which choose to lend new money to our nationalised and part nationalised banks! Barclays, on the other hand, were able to borrow a little cheaper than Nationwide. Only this week Lloyds has raised about £4bn at 3m Libor + 1.8% in the first European issue of a residential mortgage backed security since Lehman’s bankruptcy. The perception most people have is that Libor is the cost of funds to banks and building societies. However, as can be seen from the fact that Nationwide have had to pay 1.85% over Libor to borrow new money, it is not that simple. The cost to lenders of borrowing in the money market is a combination of the margin over or below Libor they have to pay plus the rate of Libor itself. Most lenders will still have FRNs issued on much finer margins before the credit crunch and the more they have still outstanding in these issues the lower will be their average cost of funds. The return of Libor rates to normal margins over Bank Rate and the re-opening of the FRN and RMBS markets are both encouraging signs for the mortgage market. These issues made sense for the lenders concerned, despite the high margin over Libor, because they still provided funds cheaper than the 3% or so they have to pay to be competitive in the instant access retail savings market, or more for 1-5 year fixed rate bonds. Now that some lenders can again raise funds in the money markets at an acceptable rate, we should begin to see more competition in the mortgage market emerging as these lenders will now be better able to take advantage of the historically high gross margins available in the residential mortgage market. This suggests that current margins above the cost of funds, both for variable rate and fixed rate mortgages, are close to a peak. Also, with house prices almost certainly going to show an increase in 2009 (my current forecast based on the Nationwide index is an increase of 6-7%) but most lenders budgeting in their 2008 accounts for a fall this year of around 15% and further falls next year, plus repossessions well below forecast levels, provisions for bad debts on residential mortgage lending in lenders’ 2009 accounts should be well down on last year’s provisions, although commercial lending may be a different story. This all suggests that conditions in the residential mortgage market should start to improve in the near future, although the extremely onerous Basel 2 capital adequacy rules mean that the spread between the cost of high and low LTV mortgages will continue to far wider than prior to 1 January 2008, which is when the current rules came into force.

Vince Cable demonstrates his economic illiteracy

Tue, 22 Sep 2009 12:20:00 +0100

Liberal Democrat Shadow Chancellor Vince Cable opened his speech at the party conference yesterday by saying "If there were ever a time for the Liberal Democrats, this is it." On that basis I presume he doesn’t expect the LibDems to ever form a Government. He correctly identified that the next General Election will be fought over the economy and then predictably tried to rubbish the two main parties’ credentials in this area. After speaking of the “enormous economic challenges” facing the country he said: “One (option) is to trust the people who led us in to the present mess to get us out of it: but this would be a triumph of hope over experience.” It is hard to disagree with that statement. But his criticism of the Conservatives was that their “life time experience of business is confined to managing their Bullingdon Club bar accounts.” He claimed that LibDems, on the other hand, were better able to sort out the economy because “These are big jobs for people who’ve been tested in the real world of work.” This presumably wasn’t meant to be a joke but it is hard to think of many LibDems who have “been tested in the real world of work”, notwithstanding the fact that Vince did have a proper job before becoming an MP, and I am not referring to his ballroom dancing! The two announcements which have grabbed most of the headlines are to impose a so called Mansion Tax on owners of properties worth more than £1m and to increase the earnings threshold before income tax becomes payable to £10,000. Cable said “It is wrong that people on the minimum wage should be dragged into tax.” The minimum wage for employees over the age of 22 increases to £5.80 per hour in 9 days time and so assuming someone on minimum wage works a 40 hour week and gets holiday pay they would earn £12,064 p.a. In fact anyone working at least 33½ hours a week would earn over £10,000 p.a. For someone who is meant to be an economist Mr Cable’s command of basic arithmetic appears to be somewhat lacking. Now for the Mansion Tax. The proposal is to impose a tax of 0.5% p.a. “on property values over £1m.” This is being interpreted as a tax on residential property but what Mr Cable actually said implies commercial property would also be included. If that is not the intention he is guilty of very sloppy wording in a speech which was no doubt pored over by several people before the final version was agreed. As the LibDems have no chance of winning an election any time soon they can indulge themselves in the luxury of announcing policies without having bothered to think through all the implications. A cost benefit analysis would be a basic step. What percentage of the cash raised would be wasted in extra bureaucracy? I suspect it would be disproportionately large, just like the London congestion charge, where road works appear to be a far bigger cause of congestion than vehicles. Until recently the LibDems wanted to abolish Council Tax and replace it with a local income tax. Now they want to introduce a tax which is in essence an extension of Council Tax. It reminds me of the old Schedule A property tax, which was abolished many years ago because it was a bad tax. Vince Cable has not stated how valuations would be obtained or how he would deal with fluctuating property prices. We know from problems with mortgage valuations that automated valuations can sometimes be way out – we have had examples where the real value established by a physical valuation has been 50% more than an automated valuation. Nick Clegg claimed it would be “relatively easy” to establish value using Land Registry documents. How naive! Using the Land Registry figures for properties which last changed hands several years ago would be prone to significant error. Furthermore it has been pointed out that such a tax would come under the devolved powers of the Scottish Parliament and the Welsh Assembly and hence either or both could refuse to implement this new tax. More egg on face as it appears Mr Cable has overlooked this minor legislative impediment. The only positive thing I can say about this tax is that at least the proposal is to apply it to the amount of the property value in excess of £1m, not to the total value of properties worth more than £1m. In that respect it is much fairer than the tiered system of stamp duty land tax Gordon Brown has imposed on us. The new Government will have to increase tax revenue after the election as it is impossible to believe the budget deficit can be contained solely by spending cuts, despite the huge scope to cut waste in Government expenditure. Vince Cable has not properly thought through this proposal but if property taxes are increased in such a way as to generate revenue on an annual basis the obvious way to do it would be to increase the number of Council Tax bands. One can argue about whether council tax is a fair tax but as long as we have it I think there is a case for adding a couple more bands at the top end. After the initial cost of new valuations the additional cost of collection would be nil. Stamp duty land tax is also in desperate need of reform to remove the unfairness and no go areas for property prices a little above the current thresholds. Such a reform could combine a fairer system, less tax on most cheaper properties but higher tax for properties above, say, £1m. A fairer tax could be something along these lines: 0 - £150,000: Nil £150,001 – £300,000 2.5% on the amount in excess over £150,000. £300,001 - £500,000: 5% on the amount in excess over £300,000. £500,001 upwards 6% on the amount in excess over £500,000. These percentages may not raise the amount needed but the principle is one which an incoming Conservative Government should adopt. Using the above percentages the amount of tax payable compared with the current system would be: Total tax payable at £250,000 would be £2,500, the same as at present but it would be less for amounts between £175,000 and £250,000. Total tax payable at £300,000 would be £3,750, compared to £9,000 at present. Total tax payable at £500,000 would be £13,750, compared to £15,000 at present. Total tax payable at £750,000 would be £28,750, compared to £30,000 at present. Total tax payable at £1m would be £43,750, compared to £40,000 at present. Total tax payable at £2m would be £103,750, compared to £80,000 at present. Total tax payable at £5m would be £283,750, compared to £200,000 at present. Total tax payable at £10m would be £583,750, compared to £400,000 at present. Many properties purchased for sums in excess of £2m are commercial and hence implementing a change along these lines would not only make the tax fairer but would in effect also transfer some of the burden from the householder to business.

The ITEM Club draws the wrong conclusion on house prices

Mon, 14 Sep 2009 17:50:00 +0100

A report today from the Ernst & Young ITEM Club calls the current increase in house prices, which it refers to as “stabilisation,” a false dawn and forecasts that property values will not return to their 2007 peak for at least another five years. It says that “while data is showing that the housing market is now beginning to stabilise, the recent rise in house prices cannot be sustained beyond the spring of 2010.” It adds “Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years. A small number of cash-rich buyers have supported prices, but the supply of these funds is limited, which means prices are likely to dip again in the first half of next year." “Mortgage lending remains depressed and with 56% of owner occupiers having a mortgage, it would be difficult to make a case for a sustained pickup in prices without a recovery in mortgage lending. However, this would still appear to be some way off. Banks are continuing to restrict the amount of money that they are willing to lend, with them looking to strengthen, rather than expand, their balance sheets." ITEM suggests that prices are likely to stagnate for the next two years, before picking up again gradually from 2011 as the wider economy strengthens and credit conditions ease. But it will take more than five years for prices to return to their late-2007 peaks. It adds, "The combination of rising joblessness and weak earnings growth is bad news for the housing market. The threat of unemployment encourages consumers to save more and to pay down debt, rather than add to their existing burden. The uncertainty also discourages consumers from committing to big decisions such as buying a house. The weakness of earnings growth has also meant that, despite the sharp drop in house prices, affordability has not improved to any great extent. The scarcity of mortgage supply and tough lending criteria is making it particularly difficult for first time buyers to enter the market." I concur with much of what the ITEM Club says but draw a different conclusion as to how the property market will react over the next 2 or 3 years. Prices bottomed out in March accordingly to the Nationwide index and since then have risen by 4.7%. As this recovers about 25% of the fall in prices I would suggest describing this as “stabilisation” underscores the extent to which prices have increased. Although the recovery is certainly based on low, albeit rising, turnover, I expect turnover to remain low (by pre credit crunch standards) for at least 2 or 3 years for 3 principle reasons: Around 3.5m people with residential mortgages (out of a total of 10m) can't move unless they sell up and rent because, even though most are paying their current mortgage satisfactorily, they can't meet lenders' requirements for a new mortgage, even one of the same size. This is either because they are in negative equity, have too little equity to provide a deposit for the new property plus the expenses of moving, have adverse credit or need to self certify their income. (Sub prime mortgages have virtually disappeared and the availability of Self Cert mortgages is not much better). However, the number of people affected in this way will reduce as property prices increase.Some people who have a very cheap mortgage which is not portable, e.g. a low SVR or possibly a lifetime tracker, might choose not to move simply because they would have to pay a much higher rate for a new mortgage if they did move. FTBs will continue to struggle to find the bigger deposits now required unless they can get help from the Bank of Mum and Dad. Thus the number of potential sellers will be severely restricted for some time as well as the number of buyers. Although repossessions are increasing they are doing so, mainly as a result of low interest rates and Government action, at a slower rate than most people envisaged when the credit crunch started. Thus I think the arguments for being cautious about price rises because they are based on low turnover fall down because turnover will continue to be low. Some opportunist sellers will come out of the woodwork when they think prices have risen enough but others will hold on as long as they expect prices to keep rising, particularly BTL investors who have reverted to lifetime tracker rates of around Bank Rate + 2%. Increasing unemployment and lack of mortgage availability is undoubtedly a problem, but prices have risen since March despite this and there are signs that mortgage availability will show a modest improvement next year, although unemployment is some way from peaking. Furthermore, on a medium term view, the fact that housing completions this year will probably be only about 50-60,000, and not much higher next year, compared to the Government's estimate that about 240,000 new dwellings are needed each year, must have an impact on prices. In my view the key to house prices will continue to be interest rates and affordability. Our economy is in such a mess that interest rates are likely to stay low for at least 2 years, although not necessarily with Bank Rate as low as 0.5% for the whole of that period. Thus I expect house prices to continue rising next year, although there may be a blip early in 2010 after the stamp duty threshold increases from £125,000 to £175,000, which will bring some purchases forward to this year. House prices will fall back again when interest rates rise sufficiently to make affordability a problem, although I expect lenders’ gross margins to narrow somewhat as rates rise and this will mitigate the impact of higher rates.