Houston, we appear to have a problem

Friday 14th August 2009

By Michael White, chief executive, Email Mortgages

Michael White is both founder and chief executive of online mortgage advisers, Email Mortgages (www.emailmortgages.com). Email Mortgages was established in 2008 and is a mortgage advisory practice providing consumers with tailored fee-free advice online via email.  Michael has been working in financial services for over 30 years and been involved in a number of new business start-ups including Chase Manhattan Homeloans, Legal & General Mortgage Services and Kensington Mortgage Company.  His last job prior to Email Mortgages was as founding director of the lender London Mortgage Company, established in 2001 and sold to Lehman Brothers in 2006.

We now know why this month’s surprise decision by the Bank of England to increase the Quantitative Easing (QE) programme was made with the Bank following up its action with a warning that the economy will take a long time to recover properly.  Essentially Mervyn King and his team signalled that financial markets had got ahead of themselves by pricing in higher interest rates next year.

Unemployment continues to grow, with some commentators suggesting a peak of 4 million will be hit before things get better.  Worrying indeed.  Unemployment is very much being inflated by the continued acute shortage of bank lending to businesses, and further exacerbated by the cost of available credit, which of course is very much above the base rate. This means that companies considered financially sound in a ‘normal market’ continue to go under as they are denied access to the finance they need.

The BoE also said inflation would probably fall sharply later this year and still undershoot the Bank's two per cent target if borrowing costs rose in line with market expectations.  It predicted inflation dropping to 0.7% in the first quarter of 2010 and a rise thereafter.  Which essentially means a clear signal has been given that Base Rate will be kept at its record low of 0.5% for a lot longer than many had been anticipating - me included.

OK, that’s my economist speak dealt with, so where does this leave matters in the mortgage market?  Well it certainly means more people will be paying closer attention to tracker products in the near future, unless fixed-rate deals fall, which is most unlikely.  But more significantly, those people who continue to sit on the sidelines benefiting from a very low SVR will not need to move as soon as was expected (meaning this side of Christmas).  Fixed rates will remain popular, for good reason, but with rates anticipated to remain low for longer I predict an increase in tracker activity and where borrower’s financial means allow, offset mortgages should also tick up.

Beyond the choice of products for borrowers and how perceptions may change what is key, as we now bump along the tail of the recession for an extended period, is the choice of lenders.  With the carnage also continuing in the money markets for a number of reasons, despite the QE programme, specialist securitising lenders are essentially out of the equation.  Which means the only source of mortgage money is a handful of high-street lenders.  And yet despite the spectacular reduction in mortgage volume some are offering very poor service, bordering on the abysmal.  But the lending oligarchy continues to thrive and prosper.

Finally, on the point of mortgage volume reduction, we certainly do have a problem.  I read recently that current estimates are for mortgage gross advances to be GBP145 billion this year versus GBP368 billion in 2007.  This is a 60 per cent decrease in availability; therefore not entirely surprising that new borrowers are struggling to get a loan above 75 per cent LTV.  Having said that, some chinks of light are appearing with the introduction of some ‘reasonable’ 85 per cent products. Nevertheless we remain, and continue to operate, in a mortgage market, which is very far from normal and we now know this is going to persist for longer than we had hoped.  Roll on 2010.