Increased regulatory pressures, lack of funds and a tough economic climate will make 2011 a challenging year for lenders and continue to restrict the availability of mortgage finance to borrowers.
Hometrack, the property analytics business, report today that home buyers face a continued struggle to obtain mortgages in 2011, with approvals expected to remain flat over the next 12 months.
Hometrack, who provide automated valuations and risk analytics to over 90% of the UK mortgage industry expect lenders to approve 1.2 million mortgages this year. These will be made up of 575,000 mortgages for new home purchases and 355,000 remortgages, while 270,000 other borrowings will be secured on home owners’ properties.
David Catt, Chief Operating Officer at Hometrack said:
“This represents no change on the 1.2 million Hometrack expect to see approved in 2010, a decrease on the 1.3 million approved in 2009 and a far cry from the 3 million-plus mortgages that were issued at the height of the property boom in 2007. The benchmark has been reset and what we’re seeing now is a new norm in lending.”
2010 was a year of economic uncertainty, causing both lenders and home buyers to delay making a decision on whether to lend and borrow. While economic uncertainty looks set to continue into 2011 and 2012, Hometrack has identified a number of other major factors that will also constrain mortgage lending in the forthcoming year.
Catt continued:
“Looking ahead, the overriding features of the lending market are those that dominated 2010, namely lenders’ constrained access to funding and ongoing regulatory pressures.”
The securitisation market, in which lenders sell packages of loans for cash to fund new loans, will continue to be constrained as it was in 2010, while the wholesale funding market, in which banks borrow money from each other and other investors in order to fund new loans, will remain unpredictable.
All this comes at a time when customer deposits that banks, and more so building societies, rely on to fund their loans, will also be hard to attract.
The Bank of England's special liquidity scheme, a loan totalling £185bn set up in 2008 as a response to the credit crunch aimed at improving the liquidity position of the banking system, will need to be repaid by the beginning of 2012.
As Catt comments:
“The pressure on banks will be immense. Re-building balance sheets and paying back the Bank of England are challenges enough in isolation, but when combined with the need to continue lending they present a difficult juggling act by anyone’s standards.”
Lenders will also be reluctant to make any major changes to their lending activities while consultation of the Financial Services Authority’s Mortgage Market Review (MMR) is ongoing.
As Catt explains:
“Early indications from the MMR consultation process suggest that lenders, in an effort to promote responsible lending, will face tighter regulation reinforcing the move toward lower risk borrowers - those with straightforward financial circumstances and significant deposits seeking to secure lower loan-to- value mortgages.”
Further regulatory pressure on lenders in 2011 will come from Basel III – the next phase of the international banking accord that will require lenders to hold higher levels of capital than has been the norm. With the rules unlikely to be finalised until 2012, lenders will be reluctant to change their practices in the meantime.
Catt continues:
“Until consumer sentiment, money markets and the global economy have recovered their equilibrium and there’s clarification on regulatory policy, lending levels will remain subdued.
“What we’ll increasingly see are lenders chasing the same group of financially sound homeowners - borrowers with big deposits and good earnings potential and security. This means that a considerable number of people could end up excluded from credit, unable to obtain an affordable loan to purchase their first home or upgrade their property.”
Hometrack forecasts that house prices will fall by about 2 per cent in 2011 but it does not expect the base interest rate to rise in 2011 and as a result repossession figures are likely to remain low. A rise in rates would be detrimental to the housing market.
As Catt explains:
“Two-thirds of mortgagees in the UK currently have standard variable rate loans. The prospect of a higher interest rate could result in borrowers looking to change their mortgages to a fixed rate, which in turn could temporarily boost lending - in particular the remortgage market.
"But there is a risk that lenders’ continuing difficulty in obtaining funding for new loans could constrain their ability to meet demand for new fixed rate mortgages.”
“Lending will not improve unless there is a dramatic upturn in both consumer confidence - which would boost the number of buyers - and confidence in the global financial markets - which would free up lenders to access funding. Until then, home buyers must recognise that the current subdued lending market is the new norm.
“The next 12 to18 months will be dominated by regulatory policy, only once this has washed through, will banks be in a position to look forward. Post 2012, we expect to see the return of competition to the market and a new benchmark for lending to be set at 1.8m.”
