Our response to the housing minister's challenge
Published: 14 November 2012 | Author: Bernard Clarke
The new housing minister, Mark Prisk, issued an important challenge to lenders in his keynote address at our annual conference last week. In unusual market conditions, he said, there was a need to think differently and to challenge existing assumptions.
If lenders really are accepting 80% of mortgage applications, as has been reported, why was there such a gap between reality and what people think is happening, he asked. "How as an industry," he continued, "can you bust the myth that mortgages just aren’t available?"
It was a pertinent question at the start of what proved to be a fascinating day of debate about the key messages for – and from – the lending industry.
The lending industry – open for business
Some of the answers to Mark Prisk’s challenge on convincing borrowers that mortgages are available were delivered in Martijn van der Heijden’s welcoming address to delegates. One of the key themes in his speech was an emphatic message that the lending industry was very much "open for business". In support of this crucial message, the chairman presented three strong pieces of evidence:
- Despite the downturn, more than one million first-time buyers have entered the market since the credit crunch began in 2007 – meaning that more than one in 10 of all current mortgage holders have become home-owners in the last five years. The market is very much open for business for first-time buyers, as well as for other borrowers.
- Lending for house purchase, rather than remortgaging, has been the main driver of market activity this year and is likely to reach £79 billion in 2012 – more than 15% higher than the £68 billion we forecast at the beginning of the year.
- The average borrowing rate being paid by mortgage customers has been lower than a year earlier for 12 consecutive months in recent times. Mortgages with a loan-to-value (LTV) ratio of 95% or 90% are inevitably more expensive than lower LTV mortgages, but their availability has improved and they are being advanced for both newly-built and existing homes. The funding for lending scheme (FLS) appears, on early indications, to be having an encouraging effect both on the availability and prices of mortgages.
Challenges for lenders
Positive data about lending for house purchase this year and the number of first-time buyers since the credit crunch reinforce the repeated findings of our surveys showing that aspirations to home-ownership remain strong, despite challenging conditions in housing and mortgage markets. Owner-occupation remains the tenure to which more than 80% of the UK population aspires. But lenders fund housing in all tenures, and continue to help to finance Right to Buy purchases and the self-build aspirations highlighted by the housing minister, as well as more mainstream home-buying activity.
More than a million first-time buyers have entered the market since the credit crunch
Martijn van der Heijden’s speech referred to the positive effects of the FLS, launched earlier this year by the government and the Bank of England. We have welcomed the scheme and consistently argued that it should make mortgage funding cheaper than it would otherwise have been. But, although lenders will have access to the FLS for 18 months, it only opened in August. So Martijn van der Heijden said the early impact of the scheme had been encouraging, but urged his audience not to judge its overall effects too soon.
A number of commentators have attributed recent reductions in borrowing rates to the effects of the FLS. "In principle, it passes the test of helping to achieve a good mortgage market, as it helps to provide value and possibly access," the CML chairman said. "Good news in principle, but let’s wait for the result to become clearer."
NewBuy – and better access to 95% mortgages
Barely two months after the launch of the FLS, Moneyfacts noted increased availability of mortgages at higher loan-to-value ratios (both 95% and 90% LTV). So 95% mortgages are available – and the NewBuy scheme, supported by the housing minister, lenders and builders, is seeking to increase their availability for buyers of newly-built houses.
NewBuy is now gathering momentum, as FirstBuy did before it. Home-buying is a slow process, so it takes time for sales to filter through and for consumer awareness of new products to build. But reservations under NewBuy have now reached 2,000 and, as the CML's director general Paul Smee argued in the conference debate on housing supply, a range of different initiatives is now having a cumulative effect on the housing market.
Although the FLS has the potential to improve both the cost and availability of mortgages, most commentators expect differential pricing for loans at higher LTV ratios to continue, particularly in a market that has been affected by a shortage of mortgage funding. During the lender panel debate in the final conference session, Matthew Wyles, of Nationwide Building Society, spoke for the majority of lenders in applauding the FLS. But it addresses only half the mortgage supply problem, he argued. The availability of higher LTV mortgages is affected not only by a shortage of funding, but by lender requirements to hold more capital against these loans.
The impact of regulation
Despite an increase in lending activity in recent months and improved availability of mortgages, lenders remain constrained by a number of major challenges. Regulatory uncertainty has been unhelpful, although the conference welcomed the clarity provided by the Financial Services Authority (FSA) last month in publishing the feedback and final rules emerging from its exhaustive mortgage market review. We welcome both the certainty and the rules themselves.
Lending for house purchase this year is likely to be 15% more than forecast
In rising to the challenges set by the housing minister, the CML chairman said that "both lenders and borrowers should thank the regulator for adopting a sensible approach, less prescriptive that originally planned. In a world of change and flux, we will still be able to change and flex to meet our customers’ genuine needs." But greater clarity has only come in the last few weeks – and implementing the new rules will take time.
Regulation – avoiding consumer exclusion
We welcome confirmation that lenders – as they seek to respond to calls to make mortgage credit more widely available – have not been precluded from lending into retirement, or from lending to the self-employed or to those with less predictable incomes. Regulation also should not preclude lenders from innovating. "If we had been," the CML chairman reminded the conference, "some customers would have been deprived of their chance to step into home-ownership; that would not be an acceptable by-product of regulation."
In his speech to the conference, the managing director of the FSA’s conduct business unit, Martin Wheatley, emphasised that the new rules had been drafted with the intention not to exclude customers from the mortgage market unnecessarily. He argued that:
- First-time buyers would still be able to borrow at higher LTV ratios, while older customers would not face age limits preventing them from borrowing beyond retirement.
- The self-employed would still be able to borrow, with lenders having flexibility to decide what type of evidence of income to require from them.
- Customers with past credit problems would continue to be able to get a mortgage, as long as they could prove they could afford it.
- Interest-only mortgages could still be sold if borrowers could show they had a credible repayment strategy, with lenders assessing affordability taking into account the cost of repaying capital as well. "The responsibility for repayment of an interest-only mortgage remains with the borrower," Martin Wheatley emphasised, "but I am pleased that lenders have, in addition to the annual reminders, taken the initiative to contact customers with interest-only mortgages."
Addressing regulatory uncertainty
Broadly, we agree that the rules have been designed to help lenders and borrowers ride out risks and cyclical fluctuations. Customers can be confident that, as lenders seek to rise to the housing minister’s challenge, their step into home-ownership will be properly evaluated.
If we see the rules make access to market more difficult than the FSA believes, we will say so
There is, however, still regulatory uncertainty, including how rules on the requirement for a credible repayment strategy for interest-only borrowers may be affected by other regulatory interventions and interpreted by regulatory authorities in future. Lenders also have concerns about how some aspects of mandatory advice will work in practice, particularly for telephone sales.
Another concern is over the effect of layering, multiplication and conflict by different regulatory authorities, with lenders having to comply with rules emerging in the UK, Europe and globally.
With this in mind, lenders welcomed the assurance by Lynda Blackwell, the FSA’s manager of mortgage policy, that the UK regulator had specifically sought to avoid explicit rules on product disclosure and financial promotion because it was aware that these areas would be covered by European regulation yet to be unveiled. Lenders are encouraged that the UK authorities are keen to avoid conflict between European and national requirements.
Lenders also welcome the 18-month period of transition to the new mortgage rules, given the scale of systems changes firms will be required to implement.
Less welcome is the potential impact of the five years the FSA has set aside for reviewing the impact of the rule changes. While lenders understand the need to review the rules over a reasonable timescale – and firms crave a period of regulatory stability – they fear that access to the mortgage market may be affected by regulatory reform to a greater extent than the FSA believes. If we see, for example, that lending to the self-employed is more difficult than the FSA expected, we will say so – and a more timely review of any rules that create obvious problems would be welcome.
Mark Prisk set the lending industry an important challenge in convincing customers that mortgage credit is available, and that firms are offering the right types of products to meet their needs and aspirations. Part of our response to him is to reinforce the message that the lending industry is open for business.
But lenders have also been actively seeking to re-evaluate themselves and identify industry-led themes under the CML's self-evaluation project, with a particular focus on what the industry can and should deliver for customers. This major task was first announced in a speech at our annual lunch in June, and at the conference we updated the sector on some of the challenges our process of re-evaluation has identified. Many of these chime with Mark Prisk’s own objectives, including:
- considering the balance between product choice and product simplicity – some lenders see a case for a narrower range of products but a renewed emphasis on rewarding loyalty and providing flexibility;
- continued funding for housing in all tenures, with individual lenders supporting the private rented sector, affordable housing, the Right to Buy initiative and niche groups of borrowers, like those who wish to finance their own building projects;
- support for borrowers by simplifying the mortgage process, so that it is quicker, less bureaucratic, better managed, more professional and uses less jargon;
- making distribution work better for the customer, with better advice and the right kinds of incentives for sales staff; and
- having a greater awareness of – and acting earlier to prevent – potential sources of consumer detriment.
Our recent conference provided an important forum for lenders to explore these – and a wide range of other – important issues and themes for the lending industry. We welcome the housing minister's contribution to the debate and the challenges for the industry in his keynote address. We look forward to working constructively with him and his colleagues in delivering many shared objectives, and helping consumers fulfil their diverse aspirations.