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Mortgages boom and bust

publication date: Aug 8, 2011
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The crisis overview

Anyone who has worked for long in the housing market knows that it goes through cycles – that some years are good, and others bad, as interest rates and the economy impact the housing market. But generally, such changes are relatively small, and gradual.

The credit crunch, on the other hand, brought catastrophic change in its wake and its effect was seen nowhere more than in the mortgage market, where boom suddenly turned to bust. While some lenders had already been raising doubts about the continuation of the boom, for instance The Mortgage Works pulled out of lending on new build as early as 2006, the mortgage crisis wasn’t directly driven by concerns about the UK housing market.

Instead, it was the availability of finance for banks and other lenders that really drove the market into crisis; so understanding what’s been happening in the mortgage sector requires an understanding of the global capital markets, and in particular the way lenders are financed (whether through retail deposits, or through the issue of bonds and other securities).

John Heron, Managing Director of Paragon Mortgages, says that the whole market froze up after the 2007 collapse of the US mortgage market, and the bankruptcy of Lehman Brothers in 2008. “The credit crisis was a global event of tsunami proportions,” he explains, “and was not a respecter of size or quality or brand or function, it affected all financial institutions. Unless you had access to taxpayer money, you couldn’t write new business.”

Lenders who were unable to secure financing to support further lending had little choice but to draw in their horns; some lenders without a retail deposits base had to stop lending altogether. The numbers tell the story; the mortgage market completely dried up. Gross mortgage lending fell from £362 billion in 2007 to just £135.9 billion in 2010, only just more than a third of the earlier total, according to figures from the Council of Mortgage Lenders (CML).

Loan to value (LTV) requirements tightened from 95 per cent (as early as 1994) to 77 per cent in 2010, that is, required deposits rose from 5 per cent to 23 per cent, almost destroying the first time buyer market. And the number of total products available fell to an all time low of 1097 in 2009, according to Moneyfacts (it has now more than doubled to 2447). Changes in the mortgage market were not restricted to frozen credit markets.

In what could be interpreted as an attempt to bar the stable door after the horse had bolted, regulatory authorities forced lenders to hold higher amounts of capital. At the same time, low interest rates made it difficult for banks and building societies to attract deposits from savers.

Lenders in the UK also faced increased pressure to help borrowers who had got into difficulty, rather than repossessing properties; that was very different from what happened in the US, and also rather different from what happened in the late 1980s property market crash. The Thaw The credit markets are still volatile; anxiety over a potential default by Greece, for instance, has seen both bond and equity markets seesawing in recent weeks.

However, the credit freeze has gradually thawed; it’s possible to raise funds again, and investors have returned to the market. Some lenders have disappeared. Victoria Mortgages went under in September 2007, perhaps unsurprising since it specialised in the by then untouchable and unfundable subprime sector. Future Mortgages, a subsidiary of Citi Group, stopped new lending in May 2008; Edeus and MoneyPartners 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’.

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
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.” 

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 arestill 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 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.”

While the market has perhaps not changed as much as might have been expected, one big change has been the extent to which mortgage rates (and indeed other rates for retail financial products, such as unsecured loans, credit cards and savings) have become delinked from base rates. Research from the CML states that, “Lending rates are fundamentally driven by the cost of funds, not the base rate, although the two were more closely correlated before 2006.”

Now, most lenders have a cost of capital significantly higher than the 0.5% Bank of England base rate, whether that’s through corporate bond issues or through acquiring depositors’ funds by offering above-market rates to savers. Mortgage lenders’ average Standard Variable Rate (SVR) now stands 3.48 per cent above the base rate, while back in 2008 it was only 1.95 per cent more.

John Heron believes the rates have become delinked “because of what has happened in financial markets, and While the market has perhaps not changed as much as might have been expected, one big change has been the extent to which mortgage rates (and indeed other rates for retail financial products, such as unsecured loans, credit cards and savings) have become delinked from base rates.

Research from the CML states that, “Lending rates are fundamentally driven by the cost of funds, not the base rate, although the two were more closely correlated before 2006.” Now, most lenders have a cost of capital significantly higher than the 0.5% Bank of England base rate, whether that’s through corporate bond issues or through acquiring depositors’ funds by offering above-market rates to savers.

Mortgage lenders’ average Standard Variable Rate (SVR) now stands 3.48 per cent above the base rate, while back in 2008 it was only 1.95 per cent more. John Heron believes the rates have become delinked “because of what has happened in financial markets, andWhile the market has perhaps not changed as much as might have been expected, one big change has been the extent to which mortgage rates (and indeed other rates for retail financial products, such as unsecured loans, credit cards and savings) have become delinked from base rates.

Research from the CML states that, “Lending rates are fundamentally driven by the cost of funds, not the base rate, although the two were more closely correlated before 2006.” Now, most lenders have a cost of capital significantly higher than the 0.5% Bank of England base rate, whether that’s through corporate bond issues or through acquiring depositors’ funds by offering above-market rates to savers.

Mortgage lenders’ average Standard Variable Rate (SVR) now stands 3.48 per cent above the base rate, while back in 2008 it was only 1.95 per cent more. John Heron believes the rates have become delinked “because of what has happened in financial markets, and While the market has perhaps not changed as much as might have been expected, one big change has been the extent to which mortgage rates (and indeed other rates for retail financial products, such as unsecured loans, credit cards and savings) have become delinked from base rates.

Research from the CML states that, “Lending rates are fundamentally driven by the cost of funds, not the base rate, although the two were more closely correlated before 2006.” Now, most lenders have a cost of capital significantly higher than the 0.5% Bank of England base rate, whether that’s through corporate bond issues or through acquiring depositors’ funds by offering above-market rates to savers. Mortgage lenders’ average Standard Variable Rate (SVR) now stands 3.48 per cent above the base rate, while back in 2008 it was only 1.95 per cent more.

John Heron believes the rates have become delinked “because of what has happened in financial markets, and because of the absolute low level of rates. LIBOR, the London Inter-Bank Rate at which banks borrow from and lend to each other, is a much better clue to what is actually going on in the markets, but the real cost of money is significantly higher than that.”

That may mean the Bank of England has lost its ability to influence the mortgage market; and for anyone not on a tracker mortgage, it may well mean lenders’ SVRs will no longer synchronise with base rates. Given that the next move in base rates can only be upwards, though it may be further away than it seemed at the start of the year, that’s a frightening prospect; some lenders could well increase their SVRs by significantly more than the increase in base rate, leaving their borrowers facing difficulties. The market has also seen a huge amount of change in the competitive situation of different lenders.

Some, of course, have disappeared, while others took advantage of problems at Northern Rock to make major land grabs. Those with a firm deposit base and no sub-prime mortgage issues were in a prime position to expand their lending. That has led to the dominant lenders increasing their share of the market. Santander, for instance, increased its market share from single figures at the start of 2007 to 13 per cent in 2008, and 18 per cent in 2010, though it fell back in the first quarter of this year as the bank reported lack of demand for its products.

Lloyds is also well up on pre-crash levels – partly through its merger with HBOS, and also though a deal that allowed Northern Rock customers approaching the end of their fixes to move on to Lloyds fixed rate mortgages. (However, its share of the gross mortgage market slipped from 24 per cent in 2009 to 22 per cent last year.) Overall, the top six lenders increased their share from 79.4 per cent in 2008 to a commanding 92.2 per cent in 2009, according to CML figures.

That marked a reversal of the trend of the pre-crunch years, which had seen specialist lenders and other smaller rivals gaining share, as the market became more competitive and diverse. “Lenders which relied completely on securitisation have been frozen out of the market by lack of finance,” says Bernard Clarke. That hit many of the specialists hard.

GMAC-RFC for instance was in the top ten lenders in 2007; it dived to 25th place in the rankings in 2008. CML figures showed specialists taking 17.4 per cent of the total market in 2006, but falling to just 5.5 per cent by 2010. Smaller building societies also went into hibernation as raising deposits became difficult.

So although the credit crunch hasn’t killed the mortgage market, it has left it badly wounded, with higher deposit and credit score requirements, fewer products, and a much smaller volume of business, and, crucially, with a handful of large financial institutions dominant.

The top five lenders, with only the Nationwide flying the (ex) building society flag, accounted for over 80 per cent of all new loans in 2009. So though in many ways the market is getting back to normal, it does appear a different kind of normal.

Apart from the safe bet that the next move in base rates will be upward, mainly because at 0.5 per cent there’s nowhere else to go, it’s still difficult to forecast what is likely to happen in the market. Uncertainty is everywhere, from the future direction of house prices in the UK to the performance of global economies, and in particular, what happens in the peripheral Eurozone economies of Greece, Portugal, Ireland and Spain.

Ray Boulger says a satisfactory solution to the Greek crisis is critical. “If contagion from the Greek situation is so serious that the wholesale markets freeze as they did with Lehmans,” he warns, “we could go downhill very quickly again.”

A finance freeze would kill all the green shoots currently seen in the mortgage market. It’s not easy to assess when base rates might move, either. When the half per cent base rate was introduced in March 2009, marking an all time low, no one thought it would still be here more than two years later. Earlier this year, most economists were predicting an early rise in rates, but following a series of disappointing economic statistics, an early rate rise looks less and less likely.

That’s led to a situation where borrowers are loath to fix their rate, particularly on two-year fixes which had become one of the commonest products on the market. “Fixed rates can be a good option,” Michelle Slade comments, “but the fact is people are seeing news coverage saying bank rates will stay low for some time, and there’s still a gap between fixed and variable rates.

There are a lot of people now on SVR because there’s not much incentive for them to move on when their deal ends.” As Catherine Hearnden says, “The Bank of England would have to raise the rate three times before trackers catch up with the fixed rate deals.” She believes five-year fixes are expensive, while two year deals look cheap, but probably aren’t worth the arrangement fee given the likelihood that base rates will remain low for some while. The reTurn of The Building SocieTy But one thing does seem to have been changing.

The big guys aren’t having it all their own way any more. The building societies are back with a vengeance, and some of the specialists are looking good, too. For instance, Ray Boulger points out, the Coventry Building Society had a 15 per cent share of net lending in 2010, having launched some extremely competitive mortgage products.

It has built its share consistently since the crash, claimed 17.1 per cent of all mortgage advances in Q1 2011, and has now thrown its hat into the ring to buy the ‘good bank’ part of the nationalised Northern Rock. Yorkshire Building Society was less active in 2008-9.

Chris Smith says, “We’ve always stuck to our guns of being a Building Society and not straying into other lines of business. We were very keen to keep high levels of liquidity and high levels of capital, we need to protect our members.” So in 2007, YBS slowed its lending down, to maintain liquidity levels, and when in 2009 the markets improved a little, it took on the struggling Barnsley and then the Chelsea, and took a while to rebuild its capital before becoming an active lender again.

However, Chris Smith says, “lending is what we’re here to do”, so as soon as capital regained pre-merger levels, YBS dramatically increased its lending. “We nearly tripled the amount of lending in 2010,” he says proudly, “and our aspiration is to grow it another 50 per cent this year.” He’s keen to ensure YBS has the most competitive products, and is also bringing Chelsea’s product range into the limelight. “My job is to get the best buy mentions,” he says, and he’s happy he managed 164 in June, against 95 from their nearest rival.

Ray Boulger says the building societies are thriving “because they’re offering personalised underwriting, not a ‘computer says no’ policy. There are lots of clients who don’t tick all the boxes for the big boys, but are nevertheless very good quality.”

It’s not just these two societies, he also mentions Rugby, Melton Mowbray, and Newcastle Building Society as strong contenders in the current market. Not all building societies are doing well, but Ray Boulger says “You can tell the ones who are struggling by the fact that they have no competitive mortgage deals.”

Catherine Hearnden agrees that “some of the building societies are coming to play quite aggressively”, Yorkshire, but also Skipton, which has announced it plans to increase its mortgage lending significantly now its mortgage business has returned to profit. She says building societies have particularly good products in specialised niches such as guarantor schemes and shared equity mortgages.

If the current thawing of the market continues, we may see the smaller lenders clawing back market share from the biggest five or six. It’s also worth noting that the larger lenders aren’t without problems of their own; a piece of research from investment bank Morgan Stanley recently suggested nearly a third of Lloyds’ outstanding mortgages could be in negative equity by the end of 2012.

That could leave the big guys without firepower just as the smaller lenders are beginning to feel confident again, so the market could be moving back towards more diversity and greater competition. One of the great changes in the mortgage market after 2000 was an increased appetite for new types of mortgage.

Endowment mortgages pretty much disappeared after their weaknesses were exposed by low investment returns in the 1990s, but they were replaced by a plethora of different vehicles, interest-only mortgages, offsets, buy-to-let mortgages, trackers, caps, collars, and fixes of various durations.

Tracker mortgages are currently popular. Chris Smith says, “They’re being used in the market to entice people off very low SVRs; with an SVR around 2.5 per cent, you can lure people with a 1.99 per cent tracker. But to be honest it’s very hard to sell a tracker when you know the interest rate is only going to go one way.” Instead, hybrid mortgages such as capped trackers and drop locks are being offered. For instance, a First Direct three-year capped tracker starts at 2.65 per cent, with a ‘cap’ at 3.98 per cent.

The higher rate undercuts the average three-year fixed deal. However, First Direct is only offering this mortgage up to 65 per cent LTV. Yorkshire offers a drop lock, “with a lower tracker rate for those who want the option, but with the ability to fix later on at the customer’s choice, and without paying an extra fee when they choose to fix.” The drop lock deal has recently been expanded from 75 per cent to 90 per cent LTV, bringing the product into the mainstream of mortgage lending.
While two-year fixes remain unattractive, Chris Smith says Yorkshire is seeing demand for long term fixes increasing as customers look for security. “Our recent five-year fix has been well received,” he says; YBS offers five years at 3.99 per cent, and Chelsea at 3.49 per cent. An even longer term fix is available from the Co-Op Bank, fixing ten years at 5.29 per cent, up to 75 per cent LTV. Leeds Building Society offers a ten year fix at 80 per cent LTV, at a slightly higher 5.99 per cent rate.

The First Time Buyer Mortgage Meanwhile, one of the major issues in the UK housing market since well before the credit crunch has been that first time buyers are priced out of the market. Before the crunch, it was a simple matter of house prices being too high; now, as mortgage funding has dried up, it’s the difficulty of finding a 20-30 per cent deposit, which can easily be £30,000 for an average property in the south-east. FTBs accounted for 55 per cent of all house purchases in 1994, but this had fallen to 38 per cent in 2010.

However the credit thaw does seem to have reached the first time buyer at last. Michelle Slade says “A lot of the big names are coming back into this sector, so there’s more competition, driving prices down.” Moneyfacts shows 183 FTB mortgages available, against only 62 in June 2009, so the market has certainly broadened.

Michelle Slade says though, “The main problem is still getting a deposit together, especially with savings rates so low. Most lenders are looking at 10 per cent as a minimum, though there are a very few deals out there at 95 per cent.” That’s borne out by Moneyfacts; of 183 mortgages, only 31, less than a fifth, offer 95 per cent LTV.

The government’s new FirstBuy scheme (which takes over from the existing HomeBuy scheme, funding for which has now ended) is also targeted at the first time buyer. By putting a 20 per cent loan together with a 75 per cent LTV mortgage, it enables FTBs to purchase with only a 5 per cent deposit. However, FirstBuy is limited to new properties from housebuilders which have joined the scheme.

Other ways of helping FTBs have been developed, such as shared ownership. However, not all lenders offer mortgages on shared ownership properties; Ray Boulger says, “You don’t have as big a choice as in the main market.” One of the difficulties is the resale criterion, which may limit resale to local residents, those on low incomes, and so on. He believes any restriction on saleability is a major deterrent to many lenders, and this is why they’re giving the market a wide berth.

However that hasn’t stopped some lenders from targeting the market, albeit generally at higher rates than for standard residential mortgages. Leeds has recently launched a number of fixed rate deals for shared ownership, trimmed its arrangement fees on them and offered
free valuations.

The equity loan scheme, on the other hand, has become more popular with some lenders than true shared ownership, where the housing association retains a stake in the property. With equity loans, the purchaser gets 100 per cent ownership, but takes out a second loan to provide the difference between the mortgage amount and 95 per cent of the property value, typically, 75 per cent mortgage, 20 per cent equity loan, and five per cent deposit.

Castle Trust is currently planning the launch of second charge mortgages to facilitate purchase, which look similar to the equity loan scheme. Its Partnership Mortgage charges no interest, but is linked to any increase in the value of the property; it is available on 20 per cent of the purchase price. Castle Trust will take 40 per cent of any increase in value, and share 20 per cent of any loss.

Ray Boulger says, “Whether it ends up cheaper or dearer than a straight mortgage depends on how house prices move,” John Charcol’s research suggests it will break even at a 3.75 per cent annual rise in house prices, but if prices rise by more than that, borrowers could lose out. However, he doesn’t think it will be a great product for FTBs; instead, “for movers, it means you can get a more expensive house for the same monthly outlay.”

Another type of mortgage aimed at the first time buyer is the guarantor mortgage. Catherine Hearnden says, “These mortgages weren’t there before the crash, they didn’t need to be. Lenders would lend on 100 per cent anyway, and in fact it’s very difficult to enforce against a guarantor, unless they have part ownership.” She says that although guarantor mortgages can help, the income multiples and affordability calculations are quite strict, and such mortgages don’t account for more than a single percentage of the market. “In fact, the Bank of Mum & Dad is more important as a source of deposits than it is for underwriting guarantees,” she states.

One area of mortgages which is not particularly well known, but which could be about to increase its share of the market, is offset. Chris Smith says, “For anyone with savings, it’s a completely tax efficient mortgage, instead of having interest paid on your savings, on which you have to pay tax, you save money against your mortgage interest payments, yet our research shows that only seven per cent of the public understand what offset is.” About 30 per cent of Yorkshire’s total business is offset, he says, against only seven per cent in the wider market, and he will be introducing offset to the Chelsea’s range of mortgages later this year.
However, only a small number of lenders have good ranges of offset mortgages, Hinckley & Rugby, First

Direct, and Woolwich vie with the Yorkshire, while ‘family’ offsets (which allow parents, for instance, to set their savings interest against their children’s mortgages, while remaining in control of their capital) are offered by several societies; Yorkshire, Market Harborough and Newbury.
The Buy To Let mortmortmortgage

Perhaps the poster boy of the boom years was buy-to-let, pretty much a new market and one which attracted competition both from specialist lenders such as Paragon, Kensington, and GMAC, and from building societies and banks. Having grown quickly throughout the boom, it was badly hit when the crunch came, both in terms of advances (down 73 per cent in number, 81 in value) and in terms of products available, which fell from 3648 at the peak in July 2007 to 330 last year according to a Paragon report.

Loan criteria were also tightened. According to Paragon, 65 per cent of products in August 2007 had an LTV of 80 per cent or more, by 2010, only four per cent did, with nearly half of them offering 65 per cent or less.

But that has changed, Michelle Slade says. “The BTL market has seen higher LTVs, and increased competition has seen rates falling, helping people back into the market. Lenders are competing to be in the best buys at the moment, they actively want to lend.”

Nationwide has been increasing its BTL share through The Mortgage Works, which together with Lloyds’ BM Solutions now dominates this market. Their share has fallen as other players re-enter the market, they had 35 per cent each a year ago, but they are still dominant.

BTL STILL An attractiattractiattractiattractiattractiattractiattractive marketmarketmarket
Meanwhile, some of the lenders who had exited this specialist market a few years ago have now come back; Kent Reliance came back to BTL in June, with an intermediary-only product that includes lending on Houses in Multiple Occupation as well as single-family properties; Skipton too is now offering BTL, and Leeds is cutting its BTL rates and fees to attract more business.

Precise Mortgages, Aldermore, and Tiuta also started lending to this market in 2010, and Bank of China has some good deals, says Michelle Slade. But she warns that the movement is cautious rather than gung-ho, “While a few smaller lenders are trying to make their mark, they’re not coming in with a big splash; they want to feel how things are before they commit more funds.”

Ray Boulger points out that BTL is an attractive market in terms of profitability and default rates. “It’s attractive to lenders as it offers a return one and a half per cent higher than residential but with no higher risk of delinquency,” he says. “If you’ve got good underwriting, then it is no more risky than residential lending. The lenders who have problems are those with loose criteria.” But, he says, the BTL market, even more than the owner-occupier market, is being held back by the current low interest rates. Since BTL mortgages revert to tracker rates rather than SVR, landlords whose fixes have expired are currently benefiting from exceptionally low interest rates. Once interest rates start to move upwards, or once a move appears more likely in the short term, he believes BTL remortgages will start to take off.

Despite the good news, though, criteria for BTL lending remain tight. Catherine Hearnden says it’s the one area where LTVs aren’t loosening up significantly; “You
just can’t get an 85 per cent buy to let mortgage any more, the way you could before the crunch.”
While an 85 per cent loan was the norm pre-crisis, with an average advance of 80 per cent, John Heron says LTV of 75 per cent is standard, with an average loan of
70 per cent. Just a few 80 per cent loans
are available.

However, he points out that even if higher LTVs were granted, higher loans would probably still fail the affordability test (monthly rental covering 125 per cent of the mortgage outgoings), which is important in the yield-driven property market. “The market fundamentals don’t work at high LTVs, so the affordability criterion often rules out higher LTVs even when they are supposedly available.”

BTL mortgages also remain significantly more expensive than owner-occupier mortgages. Heron points out that this reflects the cost of capital; “Buy to let mortgages are seen as a commercial market and thus require higher levels of capital. Typically the premium is no more than one per cent over the life of the mortgage, the average spread over base is around 3.5 per cent, much wider than it used to be, but that reflects the true cost of money in a post crunch world.”

There is a growing and flexible range of buy to let products available; for instance The Mortgage Works offers first time landlord mortgages, light refurbishment mortgages, and HMO mortgages. However, their multi property portfolio product has now been closed to new customers (though existing customers can still add properties to their portfolios). Paragon doesn’t offer a portfolio product, John Heron says that he believes they don’t work particularly well for either landlords or lenders.

Despite these reservations, Ray Boulger sees BTL as a huge growth opportunity. He says “BTL lending will increase 15 to 20 per cent this year, performing strongly in a flat overall market.” Recent strength in rental levels and tenant demand underpins the good fundamentals.

Self build mortgages are another clear niche where there’s good news for borrowers. Michelle Slade says “Not everyone wants to offer it, but the LTVs are lower than they used to be.” This is one area, though, where new entrants haven’t made much impact, a handful of lenders such as Norwich & Peterborough dominate the market.

Ray Boulger says, “It’s a sector where the building societies rather than the banks predominate.” Furness, Ecology, Scottish, and Progressive Building Societies all have targeted self-build products, while other societies such as Newbury encourage self build applicants through the intermediary route where, their website claims, “We don’t credit score and don’t have boxes to tick”, and each case is individually assessed. One of the biggest players in the sector, though, is not a building society, but Buildstore, a self build specialist which offers both mortgages and self build project management. However, it remains a specialised market. Whether the recent push by Housing Minister Grant Shapps to open it up and make it more mainstream will bear fruit remains to be seen.

Three kinds of mortgage seem to have disappeared. One is self cert. Michelle Slade says “Self cert has completely gone now, and I don’t think anyone will come back into that market any time soon.” Another is subprime (poor credit rating).

Catherine Hearnden says, “Getting a mortgage is tricky if you’re not squeaky clean. If you’ve got a good credit rating and deposit it’s as easy as it ever has been, higher LTV is where you start struggling and lenders set their credit scores much higher.” And Ray Boulger says, “If you’ve got heavy subprime you have no chance of getting a mortgage.”

But, he says, those with slightly spoiled credit records may find they can access funds. Lenders such as Precise and Melton Mowbray are looking for a clean record for the last 12-18 months, but will overlook previous problems, and Precise will overlook CCJs more than two years old.

The third mortgage type to have disappeared is interest only. True, interest only mortgages haven’t disappeared, but Michelle Slade says “Lenders are very strict on who they’ll give it to now, and the LTV on such deals has gone down significantly.” That makes it the only area of the market where recent loosening of LTVs hasn’t applied. “The number of providers offering interest-only has also reduced,” she says.

The FSA has also raised concerns about the widespread offering of interest-only terms, stating that it should only be used where there is evidence of a genuine repayment method. Meanwhile there is some evidence that banks are offering homeowners in difficulties the chance to switch to interest-only rather than face arrears, which suggests new borrowers, denied these terms, are in a sense subsidising those with existing loans.

Across the whole market, with the exception of interest-only, LTVs have been rising again. Michelle Slade points out that with the base rate remaining unchanged for so long, lenders are having to compete on something other than rates alone. “While base rates stay on hold,” she says, “we’ll see more people offering their best deals at a higher LTV.” The benchmark has now become 75 per cent, a year ago it was nearer 60 per cent. In fact, Moneyfacts figures show that the number of deals at 60 per cent LTV has fallen, while the number of products at other levels has risen.

Michelle Slade says higher LTV loans are also rising. “There are some 95 per cent deals, but they’re mostly with guarantors; 90 per cent is back, too, and getting competitive.” At 90 per cent, the average interest rate has fallen below 6 per cent for the first time since March 2008, it’s this tier which has seen the biggest fall in rates.

Overall, the mortgage market is beginning to thrive again, despite the disappearance of a few of the more difficult types of credit. But with time-limited offers, often exacting loan criteria, and new products coming on the market every week, it’s more than ever a market where expert guidance is required to get the best mortgage for clients, and in some cases, to get a mortgage at all.

So where is the mortgage market going to end up? Whatever happens, we’re not going to see boom conditions in the near future. The CML’s 2011 forecast states that, “We do not envisage a return to the lending levels that characterised the middle of the last decade for many years to come,” though the CML still expects moderate growth.

Paragon also believes the market will stabilise below peak levels. BTL advances fell from £44.6 billion in 2007 to £8.5 billion in 2009; Paragon believes that long term sustainable lending is £25-30 billion a year in ‘normal’ conditions. That’s a third lower than the peak.

We may also find that the market has become much more tactical permanently, and that the ‘productised’ market may have come to an end. Lenders have had their fingers burnt, or seen other lenders get badly scarred, and are now keen to micro-manage demand rather than pursuing lending growth at all costs.

Michelle Slade describes lenders as ‘reticent’ and says many lenders now are working on a case by case basis, and requiring more data before lending. “Lenders have been burnt before. They want to establish affordability now, not just can people afford current repayments, but can they afford an interest rate rise?”

Even if a mortgage is technically available doesn’t mean that many applicants will be accepted. “Although lenders’ windows may be full of best buy deals, it doesn’t mean they want to lend. The increase in the number of mortgage deals for those with smaller deposits is encouraging, but only a limited number of such mortgages are likely to be approved.”

The importance of underwriting has become evident. For instance, John Heron claims that Paragon’s over-three-month arrears are running at a third of the market rate, due mainly to its in-depth underwriting process and use of local valuers. Chris Smith says Yorkshire is paying attention to its due diligence, not just to improve its lending ratios, but also to help customers. “The heart of it is we want to do right by the customer, so they’re sitting down in the branch and talking it through with one of our people before
they go ahead.”

But there is significant political pressure now being brought to bear on mortgage lenders. The housing market is obviously broke, and it’s lenders who are being told to fix it. That’s already been seen in the lack of repossessions so far; while the last housing recession saw repossessions peak at 75,000 in 1991, the CML expects only 40-45,000 this year and next (after 36,000 in 2010), largely due to lenders’ forbearance in response to government pressure. However, that will have an impact on lenders’ desire to secure new business, and could temper any recovery.

There’s also been a call for more regulation. While the CML approves of sale and rentback schemes being regulated, it is not happy to see proposals from the FSA or politicians to impose regulation on LTV or salary multiples, believing that it is up to lenders to decide their lending policies. Bernard Clarke says, “The FSA’s market review is continuing, so we don’t know what the final proposals will be.
But we feel these kinds of restrictions are not what the market needs. It’s a very
blunt instrument.”

Instead, he says, the imposition of higher capital ratios for selected types of lending is a more flexible way to discipline the market. “Lenders now have to hold 6 to 8 times as much capital for lending at 90 per cent LTV, compared to a loan at 60 per cent, for instance”, making such a loan costlier. This style of regulation allows lenders to make up their own minds on credit risk and the mix of their mortgage portfolios, though still encouraging prudence.

Some regulation might well help. The Institute for Public Policy Research recently released a paper which blames loose lending for the fact that the UK has had four house price bubbles in 40 years. The UK now has more mortgage debt than any other major economy, relative to income. Mortgages represent 81 per cent of GDP, more even than the 73 per cent in the US and way above Europe’s 44 per cent.

But that cuts two ways. It may mean mortgage debt is unsustainably high, but it also means, as Bernard Clarke says, “We have a population with a huge stake in the mortgage market.” With a 70 per cent rate of home ownership, changes in the market will affect the vast majority of the population in the UK, so any change is likely to be slow and gradual.