News: Mortgages: A shock to the system

Tue, 16 Oct 07

Recent events in the mortgage markets have had a serious impact on confidence among both investors and consumers, and Mr Darling’s downbeat forecast of lower growth in his Pre Budget Report provided little obvious cheer to homeowners and potential buyers...

The fundamentals of the UK mortgage market are very sound, however, and IMLA believes that conditions are now slowly returning to normal.

Peter Williams, executive director of IMLA, says: “The turmoil in the financial and mortgage markets was attributable not to an actual problem with the credit quality of UK mortgage books, but concerns among investors that UK lenders could encounter the same problems as have occurred in the US.  That ignored the fact that the credit quality of UK mortgages remains very good.”

“Without denying that there have been some excesses at the fringes of the market and a small number of cases of consumer detriment, across the board arrears and possessions remain very low.  Latest CML data showed just 1.06% of mortgages more than 3 months in arrears, and 0.12% of properties taken into possession – tiny figures in relation to the more than 11.8 million mortgages in this country. 

Demand still exceeds supply

Mr Williams continued: “These figures are likely to increase, but we are definitely not seeing widespread delinquency among borrowers, as happened in the 1990s. While house price inflation is falling and that pattern will run through into 2008, the simple reality is that, in aggregate, demand continues to exceed supply.”

“As this suggests the fundamentals remain sound. People’s jobs are secure, LIBOR (off which many sub-prime products are priced) is stabilising and remains low compared with the 1990s, and Bank of England base rate is now more likely to fall than rise.  There is no systemic problem in terms of either credit quality or for that matter mis-selling of mortgages. Lenders apply strict affordability tests to ensure that borrowers are able to pay their mortgages when they first take them out and in the future.”

Indeed, the ‘run’ on Northern Rock was triggered by sentiment in the international financial markets – with concerns among international institutions that the bank could have problems with its mortgage books.  However, as has been recognised subsequently (including by the Bank of England) Northern Rock was and remains solvent, and has a good quality loan book.

Market disruption

The other ongoing issue has been the effective non-availability of the securitisation markets, as investors with concerns over US sub-prime have steered clear of UK mortgage-backed securities as a precautionary measure.

“We have passed the turning point,” continues Peter Williams.  “The securitisation markets are not fully back in business, but there is renewed appetite from investors who recognise the low risk nature of UK mortgage-backed assets.  We have seen a number of private sales of loan portfolios, at less fine pricing than prior to the market disruption, but this is a clear sign that investors are now realising that the reaction was overdone.”

“While fully acknowledging the difficulties that do exist, a wider recognition of   positives would go a long way to help the market move forward. It is clear we are seeing the start of a return to normality, with investors and consumers realising that the fundamentals of our market are solid and that there is no reason to stay out any longer. Shocks to the system do have an impact on everybody but confidence is beginning to return and overall we can now expect to see the mortgage market moving forward.”

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