MORTGAGE SPECIAL
Partners also disappeared from the market. John Heron says that “Those who went under were those with a weak credit structure”. Lenders which financed long- term mortgages with short term bonds faced imminent refinancing, and knew they would be unable to raise the money. Paragon, because it matched funding (for instance, backing 25 year mortgages with 25 year debt), was immune, though it was forced to raise money through the stock market; and while the financial markets were frozen, it had to stop making new loans (February 2008). It wasn’t till the middle of 2010, he says, that the markets began to thaw out. Residential Mortgage-Backed Securities
(RMBS), where a lender packages hundreds of home loans together and raises money on the back of them, were a major force behind the property boom. They increased from just £3bn in 2000 to £257bn, accounting for over a fifth of all mortgage stock, in 2007, but came to an abrupt halt in the crash. It’s perhaps the clearest sign of progress that the RMBS market has revived since the beginning of 2010, with issues by the Co-Operative Bank, Lloyds, and Santander (in May 2011, the first RMBS without a put option enabling investors to sell it back to the issuer). Yorkshire Building Society is also now planning an RMBS issue. While 2009 saw only £10bn of RMBS issuance, figures from Paragon show that increased to £60bn in 2010, and this year looks like beating that figure substantially. Ray Boulger, Senior Technical Manager
at broker John Charcol, says that though 2010 saw the trough, “the market has started to improve more quickly in the past few weeks.” He believes the test will be whether Paragon can successfully launch a $250m securitisation issue. “Assuming it goes ahead,” he says, “it will be the first post-crash buy to let issue. Obviously the scale is much smaller and the pricer is higher than pre-crash issues, but it will show that it’s possible to raise funds again.” John Heron believes the market is back
to normal. Paragon hasn’t needed to change its basic strategy or products, he says; “We came back to the market with a very similar proposition to what we were doing before, though LTVs were a little lower, and criteria tightened up. And so far we’ve been extremely encouraged by progress.” So as far as Paragon is concerned, it’s business as normal, though the extreme boom days of 2006-7, clearly, aren’t what counts as ‘normal’.
A grAduAl recovery However, although the market looks much healthier than in those very dark days of 2008-9, it’s important not to overestimate how far it has recovered. Bernard Clarke, at the Council of
Mortgage Lenders (CML) says, “The market is currently well below the size it was in 2006-7, and it’s only growing slowly; it needs to more than double from where it is now to get back to peak levels.” He points to CML forecasts that show
the market broadly flat at around £140bn this year, and rising only a single figure percentage to £150bn in 2012. If those forecasts are right, peak levels are a very long way away. And he says that while the market for
RMBSs is recovering, it doesn’t warrant too much enthusiasm; “There is some appetite for securitisation now, but it’s nowhere near where it was.” On the other hand Chris Smith, Group
Mortgage Manager at Yorkshire Building Society, says that, “While the market is still a third the size it was, this is all driven by low SVRs keeping the market inactive, since customers don’t benefit from
still asking for 20 per cent. Clarke explains that, “There is a continuing shortage of mortgage funding and one way lenders cope is by channelling money to the most creditworthy customers.” Lenders have also imposed higher fees.
Catherine Hearnden of MyMortgageDirect says, “Across the market, the standard fee is now around £1,000,” though she detects recent moves to reduce fees, or at least offer low-fee alternatives at a higher interest rate. (That’s not true of BTL, though, where fees can be as high as 3 to 3.5 per cent.) It remains a very tactical market, full of
short-term offers. Catherine Hearnden says, “You can tell when banks and building societies want to lend, but when they get too busy their service levels fall and then they put the rate up to control the flow. Santander for instance just offers deals for 5 days, their rates don’t stay put for very long.” Ray Boulger says the one-week, intermediary-only deals are “quite an interesting tactic, and one which has worked” in terms of getting Santander business through brokers. Chris Smith says YBS doesn’t play that
The credit crisis was a global event of tsunami proportions, it was not a respecter of quality or brand, it affected all financial institutions.’ john heron Md, PArAgon MortgAges
remortgaging.” Once base rates start to move upwards, he believes remortgages will increase. And he says it’s not only the absolute size of the market that counts; “In terms of competition and pricing levels, I think we’re getting back to the market the way it was a few years ago.”
tougher tActics However, there’s no doubt that the market is still tight. Bernard Clarke says, “We don’t have statistics on approval rates, but you don’t need that to see that lenders have got choosier.” Criteria remain tighter than they have
been for many years; for instance, first time buyers who were able to pay as little as 10 per cent deposit in 2007 saw the deposit demanded rise to 25 per cent in 2009, and despite recent reductions most lenders are
game. Instead, “We try to have products out there for 4 to 5 weeks.” But it’s not always easy to keep a product running; “the markets are volatile, and swap rates (which dictate a lender’s cost of funds) can move quickly.” Bernard Clarke points out that smaller lenders in particular need to regulate demand. “Lenders only have small packages of funding,” he explains, “so they make it available in that way, and they are very wary of being swamped.” It’s still a very thin market in terms of demand, too, as homebuyers worry about government cuts, unemployment, and house prices. Catherine Hearnden says, “We get flurries, just two or three busy weeks, then there’s something negative in the newspapers and it all dries up. The next couple of years look like being hard work.”
PROPERTYdrum AUGUST 2011 19
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