CML news & views

Now that the historic coalition government is finally in place and beginning to decide its policy priorities, what are the prospects for housing and mortgage markets? The issues will become much clearer next week when the Queen’s Speech sets out a new legislative programme. But a new government inevitably presents a series of fresh challenges for a lending industry that has experienced significant disruption in recent years. 

Essentially, however, what lenders need from a government remains broadly unchanged. Over the last 18 months or so, the industry has enjoyed a period of relative stability following the upheaval that began in the summer of 2007. Unfortunately, however, it has stabilised at a significantly reduced level of activity, with a shortage of funding, a small number of active firms and a sharp reduction in choice for many customers. So, what are the challenges for a new government?

• The funding shortage continues to afflict the industry, restricting lending activity mainly to those large firms that are able to secure retail deposits. However, conditions could deteriorate further if government and Bank of England support is withdrawn, as planned, during the period 2011-14 without transitional measures to fill the £300 billion mortgage funding gap.
• The economic recession has triggered an increase in mortgage payment problems. The difficulties have been kept in check, however, by a favourable combination of low and stable interest rates, lender forbearance and government intervention to support borrowers in difficulty. But finances for many households are finely balanced, and in danger of being tipped over by the withdrawal of government support.
• Despite the mortgage funding and repayment problems, lenders remain committed to financing not only home-ownership, but the private and social rented sectors. However, the new government needs to ensure that legislative and regulatory changes do not deter lenders from funding housing in all tenures, or pose a threat to outstanding commitments that firms have already made.

Now that the new government has been installed, our initial task is to put in place sound working arrangements with new ministers, MPs and advisers – and to build on existing relationships with those that remain in place. That work has begun in earnest. Fortunately, we already have good relations with a range of relevant ministers from their days in opposition.

Mortgage funding

In their election manifesto, the Conservatives pledged to create a property-owning democracy, with everyone having the chance to own their own home. The Liberal Democrats have been similarly keen to promote home-ownership. But these aspirations are likely to be thwarted without action to fill the mortgage funding gap. 

Regrettably, the coalition document published by the Conservatives and Liberal Democrats on 11 May made no reference to the shortage of mortgage funding. We believe, however, that this should be a high priority for the new government. The Bank of England and Treasury have supported the financial system through liquidity and credit guarantee schemes, but these are due to be withdrawn over the next four years.

Ultimately, lenders want a private solution to the funding gap. But support is needed to manage the transition from existing Bank and Treasury schemes. Withdrawing those schemes without providing support is likely to reinforce the existing shortage of mortgage funding, creating additional problems for many customers, including first-time buyers. And further constraints on owner-occupation will put additional pressure on the private rented and social rented sectors.

Diversity in financial services

The funding shortage is inextricably bound up with another issue – one that the new government has said it does want to address. Under a section headed ‘Banking Reform’, the coalition document says the government intends to bring forward “detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry.” 

We welcome this intention, although there are no further details of any specific policy initiatives. We have consistently argued for measures to promote a more competitive mortgage sector, with active participation by a diverse range of organisations, including banks, building societies and other mutually owned organisations, and specialist lenders. Adequate funding is, however, an essential requirement for delivering this.

Before the onset of the financial crisis, there was a diverse and competitive mortgage market in the UK, with participation by firms of all sizes and types, and choice for consumers. We welcome the new government’s commitment to diversity and competition, and are ready to support appropriate measures to encourage greater participation by a range for firms and adequate funding for them.

Help for borrowers in difficulty

Last Thursday, we published our most recent data on arrears and possessions, with numbers somewhat better than many commentators had anticipated. But we emphasised to the incoming government that the financial situation for many households remains fragile and that a continuing commitment is needed to fund the various support mechanisms that are proving effective in containing arrears and possessions.

The Department for Communities and Local Government (CLG) responded to our figures by acknowledging that the threat of possession “remains very real for home-owners across the country.” The statement said that the CLG minister, Eric Pickles, would be asking the new housing minister, Grant Shapps, “to take a fresh look at existing government schemes and make sure that they offer the best deal for home-owners, as well as value for money for the taxpayer.”

On the day we published our figures, we wrote to the new chancellor in conjunction with Shelter, and supported by Citizens Advice and the Building Societies Association. We hope that the government will move quickly to re-assure home-owners, and that the chancellor can make a clear commitment in his Budget in June to extending current support measures for borrowers in financial difficulty.

We understand the difficult spending choices the new government has to make but urge the chancellor to extend the current availability of income support for mortgage interest – which is now providing help for more than 220,000 borrowers – beyond the end of this year. We would also like him to maintain both the existing mortgage rescue scheme and the funding of financial advice for borrowers in difficulty.

Our letter concluded: “The success of the preventing repossessions agenda has been, in part, a result of strong and practical working relationships and communications between industry, government and the voluntary advice sector. We hope that the new administration will continue this spirit of collaboration.”

The Tenant Services Authority – and affordable housing

Since the 1988 Housing Act gave housing associations access to private finance, our members have lent more than £50 billion to the sector. How the social housing sector is regulated is therefore of paramount importance to lenders. It is inextricably linked to their view of risk associated with the sector, as well as their appetite for – and their pricing of – funding.

Although lenders are confident of the fundamental financial strength of the sector, their views could be affected by changes to the way it is regulated.

Lenders are aware of the need for the government to ensure that the cost of regulation is minimised and that the taxpayer gets value for money. What is needed at this stage, however, is further detail and re-assurance about the future of regulation of the housing sector. This will be a key priority in our work on the funding of affordable housing. Lenders want to engage with the new ministerial and official team on this issue, and to continue to invest in affordable housing.

The new housing minister is already aware of our support for a simplified range of affordable housing initiatives. We look forward to discussing with him our ideas for a simplified range of Homebuy options, and hope that ministers can be persuaded to ring-fence support for affordable housing, despite the pressure on government finances.

Government debt – and other regulatory reform

Overhanging the markets – and the wider economy – is a renewed determination to reduce the fiscal deficit, with clear support for the government’s approach from Bank of England governor Mervyn King. Earlier this month, when the Bank published its quarterly Inflation Report, he said it was “imperative that our own fiscal problems are dealt with sooner rather than later.” Action to address the deficit will inevitably shape the policy agenda. 

Lenders, like many other institutions in the financial services sector, will also be affected by proposed reforms affecting the balance of the tripartite structure. The coalition document refers to “proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.” 

The Conservatives’ original proposal to scrap the Financial Services Authority (FSA) therefore now looks to be off the agenda. As the Financial Times commented, the coalition document “shows a lack of faith in the Financial Services Authority.  Yet (the) regulator survives.” 

That is good news for lenders, given that the FSA has already made considerable progress on its comprehensive mortgage market review. Instability for the regulator would disrupt this process, with far-reaching consequences for lenders including a considerable increase in costs for firms and consumers.

Lenders are also concerned about the possibility of reform of court powers on possession. Although lenders already take possession only as a last resort – and courts will not uphold its use in any other way – the Liberal Democrats had proposed court reforms in their election manifesto. We are concerned, however, that any action preventing a lender from taking possession as a last resort could unintentionally further restrict the availability of mortgage funding.

Home information packs

The new government has confirmed its intention to scrap home information packs (HIPs) but retain energy performance certificates – hardly surprising as both the Conservatives and Liberal Democrats made this pledge in their election manifestos. We support the withdrawal of HIPs, which impose additional costs of buyers and sellers of property through the unnecessary duplication of searches. 

Conclusion

The political environment has been evolving rapidly and unpredictably. The challenges for lenders have been unexpectedly changed by the inconclusive election result and the launch of the Conservative-Liberal Democrat coalition. There are likely to be many proposals and policy developments affecting the industry.

The coalition’s immediate policy priorities will be clearer after next week’s Queen Speech, which will be followed by the Budget in June. We will continue to represent lenders as effectively as possible and work closely with ministers, MPs and advisers as the new coalition develops and implements policy.