What's next for the mortgage market?

Barney McCarthy assesses the current mood in the mortgage market - is it all doom and gloom?

“These are unprecedented times, different from ever before.” So said Jackie Bennett, head of policy at the Council of Mortgage Lenders (CML), at a conference for the mortgage industry held in Manchester this week. While the situation in the UK mortgage market may not be as bad as that across the pond in the US, there are fears that the situation could be heading that way. Indeed, the predicament has worsened in the US to the extent where buses take potential buyers on tours of repossessed properties to see if any takes their fancy. Further gloom has been predicted by Monetary Policy Committee member David Blanchflower, who envisages a correction of around a third in house prices over the next two to three years. Bennett also quoted CML chief Steven Crawshaw as expecting the level of mortgage lending to half in 2008, with a 30% drop in business activity among lenders.

As well as tightening their criteria and focusing more on the quality of borrowers as opposed to targeting volume, Bennett says lenders’ approach to the best buy tables has shown an about turn. “The appetite for lenders to top best buy tables has drastically diminished. Due to the servicing problems being top now attracts, lenders are fighting to avoid the top spot, rather than competing to be there.” Bennett also says the situation for first-time buyers has been likened to the mortgage rationing that occurred in the 1980s, when new entrants to the housing market found it nigh on impossible to secure homeloans.

Testing times

Many of those who have managed to clamber onto the property ladder in recent years are not out of the woods yet, however. There is a very real threat of repossession for those homeowners that will feel the financial squeeze of increased repayments as they come off attractive two- and three-year fixed rates over the course of 2008. Bennett offers reassurance to homeowners fearing repossessions though. “Lenders are bound by regulation from the Financial Services Authority which dictates that they must treat customers fairly,” she says. “An early and pro-active dialogue is encouraged to keep people in their homes. There are also options such as extending the mortgage term, converting to interest-only repayments or taking a payment holiday. Repossessions are time-consuming and costly to lenders too, so they want to avoid the situation if possible.”

The CML welcomed the Treasury £50bn cash injection, but warned that most specialist lenders and building societies would be unable to access the funds as they are only available to deposit-taking lenders – that is, those that offer savings accounts to consumers and then use this money to fund part of their mortgage lending. The trade body also called on the Government to pay income support mortgage interest (ISMI) (financial assistance for people who aer struggling to make their monthly repayments) earlier and to review the outdated £100,000 limit. The CML has also called for full regulation of the sale and leaseback sector. As an option that may have growing appeal to borrowers as the effects of higher products rates (and so higher repayments) kick in, the OFT this week announced it would conduct an investigation into the sector.

Bennett says that the mortgage market is unlikely to ever see the range of sub-prime products it had before the credit crunch, meaning that borrowers with impaired credit records may have to clean up their act before they can apply for a mortgage. She also warned that now that the securitisation model that lead to Northern Rock’s downfall has been exposed as fundamentally flawed, it may never make a return, meaning that lenders will have to adopt different ways of funding their mortgages.

Economist John Wriglesworth says things won’t improve in the near future. “The market won’t recover until the end of 2009. Within the next six months, lenders may revert to a model adopted in the 1980s whereby potential borrowers were expected to save with a lender for six months before a mortgage was offered.” The one bright spot among all this is the fact that lenders want to attract more savings business to fund their mortgage lending. As a result, many banks and building societies now offer very competitive savings accounts. If you are considering putting your plans to buy or remortgage on hold until product rates fall slightly, it’s probably worth your while finding a good account that will not only safeguard your deposit, but help it grow while you wait.