CML news & views

Money makes the world go around, or so the saying goes. Perhaps that was why our warning that net lending could halve in 2008 compared with 2007 struck such a chord at the CML annual lunch earlier this month.  

Since then, the prime minister, chancellor, and Bank of England have all been looking much more serious in terms of commitment to unblock the funding bottleneck that has been continuing to narrow ever since “the events of late summer”, as the government euphemistically likes to call them.

 At the time of writing… 

Politicians, commentators and the media remain in a frenzied state of excitement about the mortgage market. The Bank of England’s announcement yesterday of the details of its special liquidity scheme was preceded by a wave of speculation, both about the scheme itself and the exact content of the prime minister’s meeting at Downing Street with senior bankers last week. The political knives are still out, and the business pundits all have a view about the extent of the global financial industry’s culpability for the situation. 

Yesterday’s announcement by the Bank brought some welcome relief for larger, mainstream mortgage lenders, but did little to quell the political and media frenzy. Under the scheme announced by the Bank, lenders will be able to swap temporarily high quality mortgage-backed and other securities for UK Treasury Bills.  

This was the type of scheme we had been asking for and we welcomed the measure, which is initially worth at least £50 billion.  

We hope that it has the desired effect of improving the liquidity of the banking system and restoring confidence in financial markets. The shortage of liquidity is undermining markets and keeping the London inter-bank offered rate (libor) stubbornly high. What the scheme does not do, however, is give all lenders in the CML membership direct access to new liquidity. In particular, it does not include smaller building societies (which have benefited from savings inflows in recent months) and specialist lenders (who do not qualify under the scheme, although they have relevant assets). 

What is also not clear at this stage is the extent to which additional liquidity will be recycled into mortgage products or pricing, so that lenders can bridge the gap between how much consumers want to borrow and how much funding is available this year. The recent trends of removing mortgage products and higher costs for new borrowers will be affected by how libor responds to the announcement over the coming weeks.  

In the recent frenzy surrounding the mortgage market, it is all too easy to overlook the fact that the vast majority of mortgage assets in the UK continue to perform well. The Bank has structured the scheme in a way that ensures banks and building societies pay an appropriate price for the facility, and there is minimal risk for taxpayers because of the strength of the UK mortgage market.  

Meanwhile, the political and media scrutiny of the mortgage market continues unabated. Later this week, we are due to meet Stephen Timms, secretary of state for work and pensions, to talk about income support for mortgage interest, and, separately, the triumvirate of the chancellor, Alistair Darling, the chief secretary to the Treasury, Yvette Cooper, and housing minister, Caroline Flint about what lenders are doing to help their customers in these difficult times. These meetings will be looking at the various ways in which the industry, and the government, can act to address the position of home-buyers who find themselves affected by the current extraordinary market conditions.

The new world order 

Our chairman, Steven Crawshaw, summed up current issues in his speech at our annual lunch. 

Steven Crawshaw said: “Like you, I’ve been reading the daily outpouring of product re-pricing, product withdrawals, and announcements of redundancies and business closures. And I have a sense of shock at how deeply our successful industry has already been hit by these unprecedented funding market conditions. 

“But I’m also impressed by lenders’ speed of response and determination to continue to deliver mortgages to as many borrowers as possible - the vast majority who want one - within the constraints on our collective access to funds. We also continue to focus closely on managing the difficulties for those existing borrowers who may find themselves stretched in this new world order.” 

For the avoidance of doubt, what does that new world order look like? 

The truthful answer is that, even in the aftermath of the Bank’s announcement earlier this week, no-one can pin it down long enough to describe it, let alone forecast it with any degree of confidence, as the conditions we are experiencing are completely unprecedented. 

But you don’t need to be the chancellor to realise that it’s serious. 

With one top-10 lender having announced redundancies to around a third of its workforce, with the investment banks backing several other specialist lenders which are withdrawing from the UK mortgage sector, and with many lenders of all types re-pricing their products on such a regular basis that changes have sometimes been announced more than once a day, this is a market environment that is confusing for lenders, let alone for borrowers or the brokers who advise them.

A confusing choice? 

Borrowers themselves face the confusing picture of rates appearing to move in all directions – most large lenders have brought their standard variable rates down following the base rate cut, while many have raised the price of their fixed-rate lending for new customers.  

For existing borrowers reaching the end of short-term, fixed rate periods and reverting on to higher variable rates, there is an element of payment shock. But most have and will continue to absorb it, although it will be financially stretching.  

Market uncertainty doesn’t make it any easier for new borrowers - or those remortgaging - to know what kind of deal to choose right now. What can they expect in terms of the future direction of interest rates?  What can they expect in terms of the psychologically important question of what will happen to house prices?  And over what time horizon should they be basing their decisions? 

Given that there is no consensus on any of these issues from lenders, economists, business leaders, members of the Bank’s monetary policy committee or even the global financial community, borrowers can be forgiven for feeling perplexed. 

That is why both lenders and the government need to take steps to address their concerns, following the helpful announcement by the Bank yesterday.

Action by the CML 

At the CML, we have been working on a range of issues. 

We have analysed the impact of payment shock, and found it less painful than some commentators have suggested if customers act early and speak to their lender before they miss a payment. And we have worked with Money Advice Trust to produce a guidance leaflet for borrowers whose fixed-rate period is due to expire, advising them on planning ahead. 

We have been working jointly with Shelter and with Citizens’ Advice to call for the regulation of sale-and-leaseback companies, that could exploit vulnerable consumers. 

And we have also been looking at the question of how the benefits system could provide more meaningful help, without perverse side-effects, to lower income home-owners who suffer an unforeseen change in circumstances through accident, sickness or unemployment. At the moment, home-owners are not only severely disadvantaged compared to state support for tenants, but receive minimal assistance as a result of the swingeing cuts to state support imposed by the previous Conservative administration in 1995, which Labour vociferously opposed at the time – but have never reversed. 

Now, in the aftermath of the Bank’s action this week, it would be an excellent opportunity for the government to reinforce confidence in the housing market further by announcing improved state support for home-owners in difficulty.