You could be forgiven for believing that, following a number of reports in the press recently – David Cameron said that the pendulum had swung too far with lenders not lending to creditworthy borrowers.
Nick Clegg added that social mobility was being hampered by the lack of finance to first-time buyers and Liberal Democrat Lord Oakeshott said lenders were virtually on strike when it came to providing mortgages for first-time buyers.
Solving the contraction in mortgage lending is not simply about increasing finance to first timers, what about subsequent movers who cannot afford to upsize due to stagnant, or falling, house prices? If they can’t move, where will first-time buyers live?
Well, I think there are three contributing factors:
Appetite
The days of 100%+ mortgages and cheap credit are over and unlikely to return soon.
Lenders need to generate additional capital to meet new regulatory requirements, including the higher amounts of capital now required for higher LTV lending. There are also the more restrictive rules proposed by the FSA – it is little wonder that lenders are more cautious.
Having been criticised for being too liberal with mortgage finance in the past, lenders shouldn’t be criticised for lending more cautiously to responsible borrowers who can pay it back.
Funding
The availability of funding has remained severely constrained in both the retail and wholesale markets over the last three years. For building societies, the new sourcebook, introduced by the FSA, limits the amount of higher LTV lending that they can undertake.
Demand
Finally, there is also dampened appetite for mortgages. Uncertainty in the economy and the coming public sector cuts mean many borrowers are reluctant to buy for fear of losing their jobs.
In addition, the direction of house prices is unclear and rising inflation has brought the threat of interest rate increases, both of which will also have an effect on borrowers’ appetites.
Despite this uncertainty, mutuals continue to lend to first-time buyers and subsequent movers who need a higher LTV. There have been innovative products introduced by the sector in the last year or so to help those with lower deposits.
We need a sensible and transparent discussion about the state of the housing market and the part that mortgage lending plays in it; lenders need to be allowed room to innovate in order to serve the market as best they can.
The Housing Minister is trying to generate such a debate and I look forward to contributing to it.
Paul Broadhead is head of mortgage policy at the BSA
