Should HSBC achieve their lending target it will still mean 9 out of 10 mortgages will be provided by someone else. As mortgage lenders rebuild their confidence and balance sheets the offerings will get broader and more competitive. It will still pay to shop around for an appropriate deal.

Current Market Trends

There has been a welcome rise in lending at the end of 2011 and the council of mortgage lenders (CML) are expecting a further rise in the number of first time borrowers over the next few months. The comparative figures for the first quarter of 2011 were low. The stamp duty concessions which are due to end in March 2012 are encouraging buyers to take advantage.
The CML forecasts are on the gloomy side due to ‘The weak state of the wider economy and household finances. While an estimated 852,000 transactions are likely to have taken place in 2011, the CML anticipates fewer transactions next year with a central forecast of 825,000.’

House purchase lending in November 2011 experienced a year-on-year rise for only the second time in 2011, according to the Council of Mortgage Lenders. Loans for house purchase totalled 47,000 in November, a 4% rise (5% in value) from October and a 3% rise (5% in value) compared to November 2010. Remortgaging also increased.

Apocryphally the number of concluded sales seems to have been high judging by the visual effect amongst the housing for sale. Long term for sale signs now have sold on them and chains may be linking up at last. We are positive about the number of transactions but less convinced about the price at which deals will be concluded.

Note on CML
The Council of Mortgage Lenders’ members are banks, building societies and other lenders who together undertake around 94% of all residential mortgage lending in the UK. There are 11.2 million mortgages in the UK, with loans worth over £1.2 trillion.

• 36% of customers spend more than 10 hours selecting a holiday. Only 21% would spend more than 10 hours selecting a mortgage.

• 41% of customers do not shop around for the best financial products because they don’t have enough time.

This is despite the fact that looking for the best deal online and on the high street only needs to take a couple of hours. For a couple of hours work, the savings on a large mortgage can be up to £2,000. For 10 hours, a £2,000 saving equates to an hourly rate of £200 an hour. (If people are too busy they must have a good job) Reports show that many homeowners never remortgage and end up on their lenders Standard Variable Rate SVR. By remortgaging they could take advantage of lower interest rates and very significant savings

Shopping Around

• Men are more likely to shop around than women. 55 per cent of women say they do not shop around compared to just 35 per cent of men.
• One significant factor is that people get overwhelmed by the choice of financial products on offer. That shouldn’t stop you talking to at least 4 possible lenders to learn what they offer.
• Like the old graffiti ‘Be Alert – your country needs Lerts’. You are going to be stuck with your mortgage for a long time (25 years perhaps) so it makes sense to check out the deal as best you can.
• Talk to friends and relatives who have been through a similar process. It is a good time to listen to others before you make your own commitment.
• Interest rates are not the ‘be all and end all’. You need to consider the whole package including fees, customer care, repayment levels, flexibility and appropriateness for your own circumstance.

• Fool.co.uk 

‘Self-certification mortgages set to be axed!
FSA’s mortgage market review, due next week, is expected to require borrowers to produce proof of income in order to secure a mortgage’ Guardian 15 October 2009

‘Self-certified mortgages, which saw more than a million people receive home loans without proving their income, are to be withdrawn.
Lenders will impose tougher tests on borrowers to ensure they can make their repayments, the Financial Services Authority is to announce on Monday.(19 Dec 2011)’ the Daily Telegraph 17 December 2011.

Well that is telling them (again!). Over 2 years and the FSA or Financial Service Authority is still racing or crawling towards the finishing line.

More than half of all new mortgages taken out between 2007 and the first quarter of 2010 were provided without a customer having to prove their income. 25% of all mortgage products at the time were available under such self certification methods. In this way lenders did not have to prove their income and mortgage brokers and lenders could sell products that were marginally affordable.

Another mistake was treating self certification mortgages as a mass-market product without adequate internal restraint or control. Does that sound like a microcosm or representation of the whole financial services industry leading to the crash?

Good Self Certification Mortgages

• Self-certification mortgages were intended for entrepreneurs, self employed, professionals and business-people who had incomes that didn’t follow the salaried income regular pattern.
• Higher interest rates were often charged to mitigate the perceived extra risk but both lenders and borrowers were relatively happy.
• Niche products for niche borrowers were appropriate and adequate safe guards were available by treating borrowers as individuals
• Lying on a mortgage form is a criminal offence so why do we need more FSA regulation? Could it be that there have been no prosecutions for this fraud.
• Remortgaging self certified loans from the past may get some dispensation from the new FSA rules.

Commercial Mortgages for the Self Employed

• Will the new regime lead to an increase in the number of ‘commercial mortgages’, premises mortgaged in the name of the business? We think so!
• Interest on commercial mortgages will probably be allowed against your business profits. In those circumstance tax revenues will fall – well done FSA.
• If considering this option check with your accountant – the property will belong to the business not you and your spouse. Profits on eventual sale may be chargeable to capital gains tax but there may also be roll over provisions.
• Self invested Pension funds may be able to own all or part of your property.

So it remains to be seen how our dear FSA handles the issues with the second bite of the cherry. We should know more next week or a few more years.

Homeowners are looking to minimise the cost of fuel and some are leasing the roof space to host solar panels. Encouraged by the connected industries and state subsidies renting roof space looks attractive.
Mixing our metaphors ‘look the gift horse in the mouth’.

Risks of Renting Roof Space for Solar Energy

• Many leases will be designed to run for 25 years without a break clause.
• This could deter future buyers who do not want to keep the panels. The Institute of Surveyors (RCIS) think this could make it harder to sell your property in the future.
• Home owners may unwittingly breach the conditions of their mortgage by signing a roof rental lease that is unacceptable to the lender.
• Installers are not subject to any formal regulation or qualifications.
• Poor installation may cause structural damage.
• Not all agreements to rent include a guarantee to upgrade the equipment that could leave you tied to an old low quality system that looks and performs as though it is out of date. 25 years is a long time.
• You can’t remove the equipment even though it is your roof.

Homeowners Risk Reduction Options

• Buy the system yourself cost potentially about £12,000. Then collect the subsidy and sell surplus energy to power companies.
• Contract with a reputable solar installation company and engage a lawyer to sort out the details to smooth over risks.
• Consult with your mortgage provider

Solar Power Schemes

‘A company installing solar PV panels for you will usually get the income from the generation and export tariffs for the site.
You as the customer will just get the benefit of reduced energy bills through some of the electricity generated being used on your home.
Some companies offer the generated electricity at a discounted price rather than free, so do check.
As the owner of the solar panels, the company receives the full Feed-In Tariff income (about £1,100 a year for a typical 2.9kWp system).
These free solar PV offers are also referred to as ‘rent my roof space’ schemes with the solar panel owner simply ‘renting’ the roof space from you.’ Energy Savings Trust

Reposessions occur when the bank actually takes back ownership of the house.

In 2008, the number of repossessions were 40,000. In 2009, the number of repossessions were 46,000. The CML predict 40,000 repossessions in 2011.

Part of the problem is that housing costs have been taking a bigger % of people’s disposable income in the past few years. According to the consumer credit counselling service housing costs have risen from 33% of disposable income to 44%.

Why Mortgage Defaults has increased

• People stretched themselves to get on property ladder.   (house prices trebled in 1996-2007)
• Increasing Council Tax
• Rising prices of fuel, petrol and food.
• Stagnant wage growth. Combination of high inflation and low wage growth has led to decline in living standards.
• Rising levels of unemployment. Unemployment rates are forecast to rise sharply over next 12 months as recessions takes hold
• Higher levels of other debt such as credit card debt.
• Falling house prices, leaving investors exposed

This increase in mortgage defaults is likely to cause a rise in the UK sub prime market, even though their are concerns the UK housing market could be mirroring the US housing market.

The number of home repossessions is still less than in the 1990s bubble because interest rates have stayed near historic levels. This has helped increase affordability for stretched home owners.

The number of home repossessions peaked in 2009 with 46,000 or 0.4% of outstanding mortgages

related

• Statistics on mortgage default rates in UK
• Adverse Credit Mortgages

• Dangers of Sub prime mortgages

The reality of low long term interest rates is helping fixed rate deals to come down. After peaking at 5.15% this summer, average two year fixed mortgage deals have fallen below 5% for the first time since the summer.

Remortgaging which was very popular during the boom years has fallen considerably. Many are now opting to stay on a lenders standard variable rate (which was often significantly higher than special discounted rates)

Although, lenders have tentatively started to raise LTV (reduced amount of deposit required), there is evidence, the number of mortgage products could remain limited even as the market recovers.

The UK Treasury have been looking to extend mortgage protection to mortgage lenders who sell mortgages on to third party. This comes after proposals to limit self-certification mortgages, and high income multiples.

It is hoped stronger regulation of mortgages will make it more difficult for the housing market to create a boom situation. However, it will mean first time buyers will need to save a larger deposit in the new climate of stricter mortgage lending.

On a personal note, I benefitted from loose mortgage rules which allowed me to get a mortgage a large income multiple in 2004, but, given the boom and bust we have seen, it does seem to make sense to create a more stable and closely regulated mortgage industry. I’m just glad I’m not trying to buy a house now…

Why Bradford and Bingley Needed Bailout

Since becoming a bank in 2000, it changed its business model from the traditional lender into an aggressive commercial bank.

1. It was happy to lend to ‘risky’ customer, self certification, buy to let e.t.c. It is these customers most exposed from the current decline in the housing market.
2. It also raised money for mortgage finance on the international money markets. This allowed it to expand quickly – becoming 8th largest mortgage lender.

It is this second aspect of its business plan which caused into run into great difficulties. This year, it has struggled to raise enough finance because of the tightening of the credit markets (a similar problem faced by Northern Rock). The reluctance of other banks to lend to Bradford & Bingley was increased when its credit rating dropped.

This year, June, it launched a share rights issue to try and raise finance, but, it was under subscribed leaving the company looking vulnerable and exposed. Its decline in the share price has been dramatic

The government has decided to nationalise the bank, it will sell off the savings section, leaving it in control of the mortgage sector. This leaves a balance sheet of £50 billion in mortgage loans.

If Bradford and Bingley is merged with Northern Rock, the government (and therefore taxpayer) will be liable for a total of £150bn mortgages. It will make the government ‘super bank’ or ‘toxic debt bank’ as the second biggest mortgage lender.

Top 5 Mortgage lenders

Top 10 Mortgage companies (will need updating at end of credit crunch)

Shortgage of funds on the money markets. This is the biggest problem facing mortgage lenders. Most lenders do not fund mortgages just out of savings account. They fund mortgages by reselling the debt bundles in forms such as CDOs. However, since the subprime defaults in America nobody wants to buy these CDOs. Any kind of mortgage lending is seen as high risk, therefore the funds have started to dry up. This has led to big name lenders closing mortgage accounts and refusing new customers. Recently, First Direct said that it will stop mortgage lending. Other big names such as Nationwide, HSB, Halifax and smaller building societies have all said removed certain types of mortgage products.

• This means it is much more difficult to get a mortgage loan. Lenders SVR are also increasing.

Problems for Those remortgaging.  People who took out mortgages a year ago, were able to benefit from lax lending criteria. e.g. 125% mortgages, self certification mortgages were much easier to get. When they remortgage, they may not be able to prove they earn sufficient income to a new lender. Therefore, exisiting mortgage holders may be unable to remortgage

Negative Equity. With the prospect of falling house prices increasing. More homeowners face the prospect of negative equity. This is particularly a problem for those who bought with a 95% or 100% mortgage. New homeowners are having to save a bigger deposit to get a mortgage.

See also: Credit crisis explained 

However, whether 2008, will see a record year is uncertain. With house prices falling at the end of 2007, and the global credit crunch making mortgages more difficult to secure, 2008 may see a fall in mortgage lending or at least very slow growth.

Despite a consensus showing monthly house price falls, there is also evidence of increased activity in the housing market. Rightmove suggest that many homeowners have been galvanised by falling prices making house prices appear more affordable (link Times article)

There is also evidence that the November and December house price falls may have been due to the rush to get properties on the market before the compulsory introduction of HIPS on the 14th December.

According to Rightmove house prices fell in the 5 weeks upto January 15th by 0.8% to £230428.

Also a look at the Economics of Fear 

Trying to predict Inflation 

A look at the year ahead for the UK Housing Market at the Independent