More tough times ahead for the mortgage market

Increased regulatory pressures, lack of funds and a tough economic climate will make 2011 a challenging year for brokers as the availability of mortgage finance remains constricted. 

Hometrack, the property analytics business, reports today that home buyers face a continued struggle to obtain mortgages, with approvals expected to remain flat over the next 12 months.

Hometrack, which provides automated valuations, expects lenders to approve 1.2 million mortgages this year. These will be made up of only 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 that Hometrack expects to see approved in 2010, a decrease on the 1.3 million approved in 2009 and a far cry from the three million-plus mortgages 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.”



He said 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 said: “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.

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. 

Catt said: “The pressure on banks will be immense. Rebuilding 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 the MMR consultation is ongoing.

Catt said: “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 warned: “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 home-owners – 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.

“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.”