BSLS2022: There could be lender ‘casualties’ due to funding costs

Speaking on a panel at the British Specialist Lending Senate, Generation Home’s chief commercial officer Graham McClelland (pictured) said there was “demand out there for mortgage paper” and “real interest from investors for mortgages”, especially in the specialist space.

“I’m sure that in time that funding will sort itself out, but there may well be short-term, or even long-term casualties,” he said.

One recent example in the specialist lending market has been Molo Finance, that had to temporarily suspend its buy-to-let products due to capital market uncertainty. The lender also had to change some existing mortgage offers and postpone certain completion dates.

Anth Mooney, chief executive of Vida Homeloans, said: “If non-bank lenders stand still and fail to diversify their funding models, then absolutely, I think there will be some casualties.”

Mooney said that for non-bank lenders the next 12 months’ funding costs would rise given the “level of uncertainty in the macroeconomic and political environment.”

He added that when setting its funding strategy, the key consideration was, and is, “ensuring certainty” for both customers and intermediary partners so that once a mortgage offer was issued they can have full confidence that it will be honoured.

“I can’t stand here with a straight face and say that funding markets will always be open, but what I can promise with 100 per cent certainty is that once a customer has a mortgage offer from us, they will always get their mortgage, because we always pre-fund our offer pipeline,” Mooney noted.

McClelland said that timing is very important when it comes to funding, adding that Generation Home had made a forward flow arrangement at the start of the year.

He said that the company, which was founded in 2019 and is focused on first-time buyers facing affordability and deposit challenges, has two main funding lines, one from a traditional private warehouse, and a forward flow arrangement that give it “plenty of runway.”

“The availability of funding and making sure that you have enough runway to support you when times get tough is always the critical thing. That’s what keeps you awake at night, but there is also an element of luck, particularly as a small lender,” McClelland added.

“It feels like we’re through the worst of that pain. We’re working really hard on finding supplemental forms of capital that are not deposit-based but are not necessarily market-linked. So, watch this space.”

McClelland continued that savings’ rates are also going up, so deposit-based funding was also more expensive, which he said should mean big lenders start to raise pricing for their products.

“Raising retail funding from a standing start is not particularly any cheaper than accessing the wholesale markets. It’s just that over time, it gives you a more stable, broader base, particularly if you’re looking to grow your business to a balance sheet of £5bn to £7bn, and that’s quite important.”

Mid-size banks are eyeing the specialist sector

Mooney said that big banks are currently “not servicing anything that falls outside of an automated process” and for mainstream lenders “to pivot to a more specialist lender model, which requires face-to-face solutions, open flexible dialogue with brokers and deep human underwriting expertise is really expensive.”

He added: “It is clear that some larger and mid-sized banks have aspirations to move into that near prime space, that grey area between specialist and prime, a market that is quite difficult to accurately size or define. But I don’t see the larger players having the appetite or expertise to expand beyond that into more specialist customer segments.”

McClelland said that what was happening in the rungs below the biggest banks was interesting, as they might start looking at the specialist space.

“If all you’ve got to compete on is price, but you know you’re going to lose, which is what’s been happening, what do they do? What do the bigger building societies do? And where did they go next?

“I think that’s quite interesting to see whether they can do it quick enough to keep up with the more nimble specialists,” he noted.

Rising swap rates will lead to price correction

McClelland added that previously if swap rates, which are integral to lender product pricing, had gone up by five basis points in a week that would be a “big deal”, whereas now they have continued to go up and up.

“I think this might be the first time in mortgage market history, certainly within decades, that the average the average product rate for a 75 per cent loan to value (LTV) mortgage was sub-swap rate. That means the big banks are out there lending money at a cheaper rate than it cost them to borrow in the market and this cannot be the most efficient use of their capital.”

He added that this was aided by having a “huge sticky base of customers that cost them next to nothing.”

Mooney predicts that mortgage pricing will continue to rise in the coming months, and that Vida has repriced some of its products due to increased funding costs.

“Some of the rates being offered in the market are unsustainable and we should expect to see a correction in both buy to let and residential mortgage pricing in the weeks ahead,” he said.

He added that forward swap rates were up by around 100 basis points since the start of the year, the prime market has responded with price increases of up to 70 to 80 basis points, whilst the specialist market has been slower to respond, with rates increasing by only 20 to 30 basis points so far.

Mooney continued that with ongoing talk of recession, there will also be discussions had across all mortgage lenders about credit risk appetite and the availability of mortgage credit, especially at higher LTVs.

“The current dislocation between forward swap rates and bank base rate is driven primarily by uncertainty. It’s uncertainty that kills markets and that uncertainty will therefore drive into a lenders appetite for risk,” he added.