Northern Rock resumes lending - what will be its impact?

The announcement that Northern Rock is to resume mortgage lending (£14Bn by the end of 2010) is welcome for the mortgage market as a whole but will probably only drive indirect benefit for the Buy To Let sector.

The gov't announcement on Monday that Northern Rock will resume lending on homeowner mortgages with £5Bn this year and £9Bn in 2010 came after weekend speculation that NR would be lending £15Bn - funny how the press always seem to know what happens at NR before any real announcement.

The fact that only £5Bn will be lent in this year is acknowledgement that it will take time to build a pipeline from which to complete the loans. Given that we are approaching the 3rd month of the year this is a pragmatic figure for the remainder of 2009. They have been doing some lending over the past few months so it won't be difficult for then to gear up their operations.

That aside it is good news for the market for the following reasons...................

More money supply and improved lending criteria will help to ease the credit crunch and provide some competition in the residential mortgage market. As a consequence real lending margins may reduce slightly.

Whilst NR are unlikely to promote Buy to Let mortgage lending (they do actually have a couple of pricey Buy to Let products) the element of competition may encorage other lenders to switch some resources from residentail to Buy to Let lending.

Additional funding for personal residential mortgages is a pre-requisite for stabilising the housing market as a whole and much of the Buy to Let property is First Time Buyer or Second Mover property which will receive an uplift if homeowner borrowers start to re-emerge at the Estate Agents !

All in all a welcome development.

CML reports lower than expected reposessions for 2008

Original predictions of 45,000 reposessions in 2008 were better than expected at 40,000 with Q4 reposessions lower than Q3 !! On a "number of months" basis, 219,100 mortgages were in arrears of more than three months at the end of 2008, up from 166,600 at the end of the third quarter of the year however these figures are measured against "current month" mortgage payment. In a lower interest rate environment this can overstate the position and when rates are rising the number may appear lower .... mortgages on fixed rates are not affected by this anomaly.

Figures from the Council of Mortgage Lenders released today show 40,000 people lost their home last year, representing 1 in 290 mortgages and up from 26,200 in 2007.

Around 10,400 properties were taken into possession by first charge mortgage lenders in the fourth quarter of 2008, down from 11,100 in the previous quarter but up from 6,900 in the fourth quarter of 2007.

The total number of first-charge repossessions in the year was an estimated 40,000. This was 5,000 lower than the CML's original forecast for the year.



The fact that there were 11% fewer repossessions than expected, despite a worsening economy and rising unemployment, demonstrates that mortgage lenders are making strenuous efforts to ensure that repossession really is a last resort claims the CML.

It also says it is important to recognise that repossessions include a proportion of abandoned properties and property fraud.

They also include Buy to Let repossessions, as well as home-owner repossessions.

At the end of 2008, around 182,600 mortgages - or 1.57% of the total - had accumulated arrears equivalent to 2.5% or more of the outstanding balance - for example, £2,500 or more on a £100,000 balance (a £97,500 mortgage plus £2,500 arrears).

This compares with 1.29% at the end of the third quarter of 2008, and 1.08% at the end of 2007.



On a "number of months" basis, 219,100 mortgages were in arrears of more than three months at the end of 2008, up from 166,600 at the end of the third quarter of the year, and up from 127,500 at the end of 2007. However these figures are measured against "current month" mortgage payment. In a lower interest rate environment this can overstate the position and when rates are rising the number may appear lower .... mortgages on fixed rates are not affected by this anomaly.

However, the big reduction in mortgage rates experienced in 2008 was a significant influence on the rise in the number of arrears cases measured on a "number of months" basis - as the same given sum of arrears represents a higher number of months payments as interest rates fall.



Michael Coogan, director general of the CML, says:"Despite the upward pressure on mortgage arrears and repossessions arising from the problems in the economy and rising unemployment, both lenders and government are continuing to find more ways to help more people stay in their homes.



"But there seems to be a sharp rise in cases where borrowers are handing back their keys or abandoning their properties. We strongly urge borrowers to contact their lender and work with them before taking this step, as there may be other solutions.

"Borrowers are still liable for their debt, even if they leave the property, so working through their problems is much more likely to be in their best interests."

House prices - are they falling or rising? Both apparently!

A subject close to all of our hearts and we think we understand what is happening to average house prices – until Nationwide announces that prices fell by 1.3% in January and Halifax announces they rose by 1.9% in January. Very confusing when it comes to residential mortgages and Buy to Let mortgages! Further investigation only makes the situation even more confusing as a plethora of other indices appear to tell strikingly different stories:

So which one should you believe? The answer is - it all depends ...

Rightmove is a survey of asking prices and thus should be a leading indicator of prices – but quite clearly as the market started to turn down in early 2008 it took some months for sellers to adjust their expectations downwards to more realistic levels. The upturn in January 2009 is interesting if it represents something more than vendors deluding themselves.

Hometrack index is a survey of Estate Agents estimates of current prices in their locality – and they do not usually publish the full results of their survey. When the full data is examined their average price is the lowest of the above surveys.

Land Registry index is based on prices recorded on sales at the Land Registry and therefore has a “natural” bias in favour of those properties that tend to be traded regularly.

Halifax and Nationwide indices represent the prices used in valuations for mortgages issued by the respective lenders. In theory they should tell similar stories – but differing criteria on mortgage products available at any given time can “skew” the samples to produce very different results as has happened in January. Also the Nationwide index is published during the month (rather than after the end of the month) and consequently is not strictly an index for the month as a whole – although this should obviously balance out over time.

FT HPI uses more sophisticated methodology to pick out the best of the other price data (in particular Land Registry) and should represent a more “reliable” guide to price movements – but I have to admit this analysis is based on a review of indices produced by “Acadametrics” who also produce the FT index!

What can be said with a reasonable degree of confidence is that prices paid have fallen by around 15% from their peak and that many vendors are still holding out for better prices – there is no evidence in the statistics of significant distress selling.



Further information on the different indices is at http://www.acadametrics.co.uk/House%20Price%20Indices%20Fact%20or%20Fiction.pdf

Mervyn King says the recession may be longer and deeper than expected!

So, Mervyn King has announced that we are in a deep recession and that it may be longer and deeper than expected. He has indicated that cuts in rates may no longer be enough to stimulate the economy and that they will need to look at other tools at their disposal.

This in effect means that it is likely that the Bank of England will start to purchase Government bonds and gilts direct from the treasury to increase the supply of money in the economy. Not quite “printing money” but this is the “Quantative Easing” that has been talked about so much recently.

With Mervyn stating that rate cuts are not enough to turn the economy around, there is the question as to whether we will see further Base Rate cuts and whether the current 1% is the lowest rate we will see. My personal opinion is that if the Bank is keen to use all tools at it’s disposal then it might as well carry on bringing rates down below 1%. RBS are now forecasting a further reduction of 0.25% in March and a further 0.25% in April bringing rates to a new low of 0.5% - it is not out of the question that we will see 0% rates this year!

As the Bank grapples with stimulating growth it will hopefully not be too long (mid 2010 is my guess) before we will see rates increase again. The inflation target of 2% will remain and the Bank of England will look to increase Base Rate to keep Inflation under control.

With regard to mortgage rates, the latest Base Rate reduction has had little affect on products but there are deals to be done. For residential mortgages, there are now some great fixed rate mortgages about, an example of which is an attractive 5 year fixed rate of 4.29% with a flat fee of £995. Buy to Let products are still at commercial terms but this is unlikely to change for the foreseeable future and many landlords are now looking at the fixed rates currently available – as an example, at 70% you can lock in for 5 years at 5.54% with a 2.5% lender fee – pretty good in the current climate. As mentioned in previous blogs – I do not envisage Fixed Rates falling further so now would certainly be the time to act.

Will everyone benefit from the 0.5% cut in Base Rate?

Much media focus over the last 5 months has focused not only on how much lenders reduced their SVR but also on the date at which it will be implemented. This is monitored very effectively by the BBC on http://news.bbc.co.uk/1/hi/business/7872344.stm and you can see who passes on what amount and how quickly they do, or don't, apply it. You can also see our own graph below.

Many residential mortgages are on fixed rate mortgages of 2, 3 or 5 year duration. These borrowers will generally be paying mortgages between 4.75% and 6.75% and will be looking carefully at the clause that identifies what price they will pay after the initial fixed rate period. The majority will revert to the lender's standard variable rate (SVR) which is at the lender's discretion and currently varies from 3% to 5.79% (ignoring one lender with an eye watering 8.44%). Several have already stated their intent to pass on the latest rate cut in full (Nationwide, LLoyds, HBOS and Woolwich) but this will still mostly be on a margin greater than Base + 2%. Borrowers should also check that their mortgage doesn't include a "collar" that would impose a minimum interest rate - for example 3%. The most fortunate borrowers are those who have a Bank of England Base Rate (BBR) linked mortgage where the 0.5% cut is applied with immediate effect !

For the very small group of borrowers who have a mortgage headline rate with a discount of 1% or more to BBR , there is the delightful prospect of a negative interest rate. In reality this simply won't happen but there doesn't yet seem to be an industry wide solution to this conundrum. Even when this is agreed, I doubt whether most lenders computer systems will cope !!

Buy To Let borrowers mostly benefit from mortgages that are linked to BBR or LIBOR rate and will have enjoyed ever improving cashflow in recent months. We have not identified any "collar" clauses in the Buy to Let mortgage sector. Some borrowers will be on SVR with a lender and if that lender is no longer actively supplying new mortgages they may not be passing on BBR cuts in full to borrowers - 4.84% SVR doesn't seem expensive until you equate it to BBR + 3.84%. Refinancing these mortgages to other lenders can sometimes also release equity for further purchases if gearing is relatively low.

Business borrowers are invariably funded to BBR or LIBOR rate - sometimes lenders will stipulate that loans above £1M, must be funded to LIBOR to mitigate risk. A few banks will offer "dual pricing on each transaction - BBR + 2.75% or LIBOR + 2% ie the differential between the LIBOR and BBR in the money markets. For these borrowers the issue isn't so much price as the availability of credit !!

The Government will maintain its focus on BBR and cite any lender as irresponsible who doesn't match the BBR reductions regardless of the real funding cost either from wholesale funds or from retail deposits. And of course this portrays them as the consumer's champion which will be important as a general election approaches; but now that they (and us as taxpayers) have significant stakes in both RBOS and Lloyds HBOS and full ownership of Northern Rock and Bradford and Bingley, they need to be mindful of their investment in these institutions when they issue headline grabbing statements.

By clicking on the below you can see a consolidated list of lenders and any benefits they have passed on. We will be updating this as things develop.

Bank Base Rate now seems set for 0.5% cut on Thursday

There is an increasing acceptance that the woes of the economy at large will not be fixed and consumer confidence improved by cuts in Base Rate (BBR) alone. The media are now looking for signs of quantitative easing to improve market liquidity and thereby take the pressure off LIBOR rate that is stubbornly stuck at 2.17% - a premium of 67bps to BBR at 1.5%. Even SWAP rates have started to move up over the past week with 1, 3 and 5 year money at 1.77%, 2.44% and 3.01% respectively. This has tempered the appetite of lenders for reducing their fixed rate offerings ion both the residential mortgage and Buy to Let mortgage sectors.

Indeed even with a 0.5% cut in BBR to 1% there will be several lenders with discounted mortgage offerings completed back in 2007 where the effective pay rate is 0% or, theoretically, -0.01%. Whilst the conundrum of how their systems will cope with this equation is an interesting topic of debate , it does pose very real question marks over the returns to savers where many lenders are currently looking to resource funds for new loans and mortgages.

There is a view gaining support that BBR may reduce to 1% and stay there for a considerable period of time - but this doesn't yet seem to be showing up in SWAP rates. As with LIBOR rate some of these current pricing issues may be down to the reluctance of banks to trade when they still have concerns that some banks may yet face nationalisation.

The net result is that there are some good fixed rates out there which may not improve significantly unless and until such time that the markets find some equilibrium and medium term confidence.