I’ll begin by looking at the lending activity by those institutions signed up to the FLS scheme. To date it is abundantly clear that building societies and other mutual lenders remain the main driving force behind growth in the UK mortgage market.
While overall the FLS scheme has increased net lending by £3.6bn only mutuals have increased their net lending by £15.7bn whereas other lenders have reduced the lending on their collective balance sheets by £12.1bn.
Mutuals are not reliant on the Funding for Lending Scheme but a number have quite sensibly taken the opportunity to diversify their funding lines and utilise the attractive terms available through the scheme.
The supply of wholesale funding has increased since the introduction of the FLS and mutual lenders have seen strong inflows of retail deposits this year. The removal of this stimulus is unlikely to have a significant impact on the availability of mortgage finance, although it could have some effect on interest rates next year as we continue to edge cautiously toward more normalised market conditions.
The governor of the Bank of England remarked last week that housing transactions remain low relative to historic levels and that underwriting standards have improved since the crisis, although he did also caution that “risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness.
“These risks would be amplified if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles.”
Clearly it is necessary and right that the Bank has a range of tools in its kit to manage financial stability. However, when and how these tools are deployed should be a matter for caution and consultation.
Great care must be taken, particularly when there are a range of interventions in the market as at present, to ensure that prior to intervening directly in the mortgage market the Bank has fully assessed the cumulative impact of these interventions.
The Mortgage Market Review rules come into force in April 2014 and if enforced effectively then these should further mitigate against the risk of underwriting standards weakening in the future and therefore reduce the need for the Bank to intervene separately.
Paul Broadhead is head of mortgage policy at the BSA
