CML news & views

Our 2009 annual report, published this week, reflects upon a year in which the lending industry began the process of recovery. It was a year of steady improvement, in contrast to the period of seismic change endured by lenders and borrowers in 2008. Generally, the industry ended the year in better shape than 12 months earlier, and was able to look back on tough times and to the future with greater confidence.

Despite continuing improvement, however, the mortgage market remains small and risk-averse. There are still enormous challenges ahead for lenders in a market in which there are:

• too few participants;
• insufficient funds to meet demand from borrowers – with the prospect of mortgage rationing; and
• huge regulatory and political uncertainty, compounded by the mammoth fiscal deficit.

Amid all the continuing uncertainty, the report explains how we sought to help the industry communicate with a clear and consistent voice. We endeavoured to deliver coherent messages on behalf of lenders, underpinned by data and credible, informed analysis and comment. It was important, however, to acknowledge that firms were affected by the continuing impact of the credit crunch and financial crisis in different ways depending on:

• their structure – banks, building societies and other non-bank lenders;
• their funding model – retail, wholesale or mixed; and
• their size.

The clear winners in the market last year were those larger lenders that managed to maintain their funding lines. The comparative losers included some building societies that have been forced to hibernate through the recession, and the non-bank sector, which remained largely closed to new business. 

We will continue to campaign for – and support – measures that will allow more lenders to be active in the market and encourage greater participation by different types of lending institution, and large and small firms. Our goal is to help restore once again for consumers the benefits of a thriving, well-funded, diverse and competitive UK mortgage market, which serves responsibly a broad range of borrowers’ needs at every stage of their lives.

Helping through difficult times

The over-riding concern during the period covered by the report was that things could get much worse for borrowers, with a sharp rise in arrears and possessions. At the beginning of 2009, the economy was still deep in recession, with unemployment expected to rise sharply. A little over a year ago, however, the Bank of England cut its base rate to 0.5%, the lowest in the Bank’s 315-year history. And low rates have proved to be crucial in helping borrowers and lenders manage payment problems.

Lenders have continued to show forbearance, where possible, and to take possession only as a last resort. One of our key priorities in recent times has been to help lenders manage an anticipated increase in arrears. The reality is, however, that in 2009 lower-than-expected interest rates and unemployment meant that levels of arrears reached a plateau, rather than rising as sharply as expected.

However, we cannot be complacent about arrears and possessions in the future. The severity of the financial crisis and the continuing upward pressure on unemployment means that payment problems will persist and may take some years to subside to former levels. We have forecast 53,000 cases of possession this year, although we will, of course, continue to monitor the market and keep our predictions under review.

Managing regulatory reform

In our report, we recognise the inevitability of regulatory reform in the aftermath of the financial crisis. But we also argue that it is crucial that reform is proportionate and based on a clear understanding of:

• what went wrong in the past – based on evidence, not perception or prejudice;
• the impact of reforms that have already been – or are being – implemented; and
• causes of consumer detriment, now and in the future.

Since the Financial Services Authority (FSA) embarked more than a year ago on what eventually became its comprehensive mortgage market review, we have worked with both lenders and the regulator to address the issues. The views expressed to the FSA have been based on extensive consultation with all types of firm: banks, building societies and specialist and government-owned lenders. And we have concluded that reform must be based on some key principles:

• The UK mortgage market has worked well for the majority of borrowers.
• Reform must be targeted at clearly identified market problems and sources of consumer detriment, and blunt tools that have wider, unintended consequences should be avoided.
• Reform must help restore a flexible, competitive mortgage market, and there needs to be a shared vision of what this looks like. We believe it should be a diverse market, in which a variety of firms are able to compete.
• The FSA needs to improve its supervision of firms and aim to be a more effective regulator, with an intensive and intrusive approach. That does not necessarily mean that we need more conduct of business rules.
• Proposals for reform must be tested by rigorous cost-benefit analysis, based on reliable and comprehensive market data.
• Changes proposed by the FSA must anticipate the impact of other regulatory initiatives, particularly prudential reforms and measures emerging from Europe.

Delivering value for members

Over and above the key issue of mortgage regulation, we have been monitoring around 120 policy topics on behalf of members on a diverse range of subjects. We continue to provide a forum for discussion of issues for members, and to lobby the appropriate authorities and other representative bodies on behalf of lenders. Some of the larger issues we cover in the annual report include our work on:

• Combating mortgage fraud. We provide a forum through which members pool information and share experiences in order to tackle fraud. We also continue to work closely with other stakeholders, including police, the Serious Organised Crime Agency, the National Fraud Authority, the FSA and the Solicitors Regulation Authority.
• Lobbying for a framework in which lenders can contribute to the funding of all tenures. Since home-ownership peaked at almost 71% of the population in 2003, it has declined to 68% today. In our view, this vindicates the work we have undertaken in recent years in support of a balanced tenure, promoting opportunities for lenders to fund private and social renting, as well as owner-occupation.

To help ensure members keep abreast of events in a rapidly-changing operating environment, we continue to host a series of seminars, conferences and other events tailored to the evolving needs of firms. Despite the pressures on lenders’ budgets, we have been able to maintain attendance levels at our events with the continued support of excellent speakers, and by focusing on newly emerging issues and challenges for firms.

Sharing our insights

Although the mortgage market has become more stable recently, the industry has been through a period of unprecedented upheaval since the onset of the credit crunch almost three years ago. Our statistical coverage has helped to explain what has been going on in a rapidly changing market. The data and analysis we produce feeds directly into our policy work, and adds credibility to our market commentary.

• Working with the FSA and the government, we have been monitoring key market indicators affected by the slowdown, including trends in transactions and loan performance.
• The insights from our statistical and analytical work have enabled us to put forward a credible, evidence-based challenge to inappropriate policy options, including proposals to cap lending relative to property value or income, or ban ‘fast track’ processing.
• Contributing to the government’s home finance forum, we have been able to provide crucial market data, analysis and commentary as the Treasury and Department for Communities and Local Government sought to develop their understanding of – and policy responses to – the dysfunctional mortgage market.

Messages and the media

Although the media environment has become somewhat less hostile than at the height of the financial crisis, media scrutiny of lenders persists, and we continue to brief journalists on behalf of the industry. Our approach is to address the criticisms directly, and use data to reinforce our view of market dynamics and business rationale. One area in which we adopted this approach in 2009 was on the issue of mortgage pricing and profitability. We emphasised to journalists that:

• while swap rate are often cited as “the cost to lenders of fixed rate funds,” the reality is more complex;
• not every firm can raise money at quoted inter-bank lending rates;
• the cost of variable rate funding is a key issue, given the continuing problems associated with wholesale funding, and the different funding models of different lenders;
• the prevalence of fixed-rate mortgages, combined with the low interest rate environment means that re-pricing of existing loan books is only happening very slowly; and
• other operational costs for lenders are rising, and the cost of regulatory requirements to provision for losses has increased.

The political agenda

In the aftermath of the financial crisis, with the economy still weak and the prospect of a new government in the offing, the likelihood of political intervention in housing and mortgage markets has rarely been greater. It is difficult to recall a period in which it has been more important for us to work closely with politicians of all parties to explain the issues on behalf of lenders.

In the run-up to the election, we increased our public affairs activity significantly, and will sustain this work in the coming months. In the aftermath of the election, we will continue to meet regularly with ministers, shadow ministers, MPs and other Whitehall contacts to help identify the issues, build relationships with the key political figures, and contribute to policy development.

We have also been building relationships with members’ own public affairs teams in recent months, reviewing and updating key messages and co-ordinating activities in anticipation of the election. We have analysed each constituency, embarking on a huge exercise to identify Parliamentary candidates, including those who are likely to become MPs and who, as a result of their background, may be interested in finance and housing. This will help ensure our policy work remains properly targeted in future.

The future

The annual report records our activities during a busy and eventful year for lenders.  But the prospect of a new government highlights the need for us to continue to look forward. We are therefore now working on a plan for the coming years that will ensure that our activities continue to remain focused on the key issues for lenders and borrowers in the challenging times ahead.