UK mortgage market

Tuesday, October 9, 2007

The UK market has been caught in the cross-fire of the US situation. A lack of liquidity in lending markets has surfaced caused by banks being less willing to lend to each other, as they are concerned as to who is holding the real losses.

Over the coming weeks it is estimated that $120bn of short-term finance, including up to $56bn of asset-backed debt, is due for renewal between institutions. Because issuers are desperate to win back investors we need to be careful that margins aren’t artificially increased in order to cushion subsequent sales of back books to the detriment of the end consumer.

This is not a situation with which we are unfamiliar, having experienced similar market problems during the end of the last recession. This resulted in some of the newer industry entrants, in particular American lenders, withdrawing from the UK market.

At times like this the value of mortgage brokers will be increasingly important, through knowledge of the strength and stability of lenders. Our concerns over smaller lenders are that they are potentially less established in the UK and could be the first to withdraw from the market in the event that they suffer in home markets.

We need to ride out the storm. Keeping calm and doing the right thing for our customers is the best way forward. It is at points in time like this that responsible lending and robust affordability criteria properly applied, come into their own.

What is certain is that in the short-term, borrowing is likely to cost more, particularly in the sub-prime markets. The pressure will increase as lenders have on-going difficulty in raising tranches of finance to fund their product ranges. In order to maintain interest in the funding of packages of securitised debt, lenders have had to increase interest rates and this has filtered down to products, which have seen marked increases in cost. It has also led to a tightening of criteria, particularly with lenders at the heavy end of the adverse market, who need to ensure that their back-books are still desirable commodities.