15th June 2009
Credit supply is still the big issue.
Mortgage Strategy: Alan Cleary's column....
Possibly everyone reading this column hopes that the recent positive signs in the housing market are real and that this is the start of a bottoming out of house price declines. I for one hope this is the case but I am still hugely cautious; generally you only see the bottom by looking backwards as forward looking indicators often predict false dawns. The key issue is supply of credit, the Halifax and Nationwide house price indices in my opinion are just showing a temporary mismatch in the supply and demand dynamics, that is to say that demand is slightly up whilst the supply of houses for sale has gone down.
Back to the supply of credit; according to the BofE the difference between what our banks have lent out and what they have borrowed from savers and institutions is £740bn compared to nil in 2001, or in other words British banks have been raising about 40% of all the loans they have made from wholesale sources. The gap was largely funded by borrowing money from China, India and other booming eastern nations who have now been spooked and really don’t want to lend us any more money. So now our banks have to find a way to wean themselves of this wholesale debt and the way in which this has been done so far is to borrow from the taxpayer. So far the taxpayer has lent or guaranteed the banks about £600bn but many believe this is not enough to balance the deficit, therefore it is very possible that we have not reached a state of equilibrium yet. I hope like all of you that the bottom of house prices has been reached but I am of the opinion the supply of credit has not yet reached a sustainable level that will keep house prices on an even keel.

8th June 2009
RMBS arrears hike is to be expected.
Mortgage Strategy: Alan Cleary's column...
Recent reports that Prime RMBS has experienced a jump in arrears should come as no surprise; what were people expecting, an improvement in performance! There are three factors causing this deterioration none of which are going away anytime soon. Firstly, unemployment is rising and will continue to do so for at least another year. Second, because the supply of mortgage funds is so tight only prime borrowers with low LTVs stand a decent chance of refinancing. This stops people who are in arrears or are experiencing difficulties remortgaging their way out of trouble. Finally, monthly mortgage payments have come down as a result of base rate reductions and this means that when you divide the arrears by the monthly payment the number of months in arrears will have technically gone up. Until we get mortgage funding moving again house prices will continue to slide and the knock on impact on jobs will continue this vicious circle.
The US has been much more aggressive in trying to stimulate new issuance of RMBS. In the UK we still haven't made any inroads into getting investors interested. There were some ideas in the Crosby report but they have yet to materialise in full and don't go far enough to make a real impact.

Securitisation still remains a good way to restore liquidity into the markets providing investors believe that the risks are transparent. Far too many clever bankers, traders and ratings agencies muddied the waters by layering risk on risk on risk and getting AAA ratings for asset that is now known to be anything but. This is where the government should focus its attention.

1st June 2009
Show mortgage fraud the red card.
Mortgage Strategy: Alan Cleary's column....
No one likes admitting they’ve made a blunder and it’s no different for lenders and mortgage fraud. Fraud is wildly under-reported in official statistics - millions of pounds of fraudulent loans are written off as credit losses every month because they slip through the net unidentified. The credit crunch has swept through the UK’s mortgage market and left it barely half of its size just a year on.
Instead of continuing down old roads, lenders should see the changing winds as an opportunity to streamline their lending practices and stamp on fraud. The lending community must work together to identify risks – reassessing mortgage books can throw up patterns of fraud undetectable at origination. Things are only going to get worse as Britain slides further into recession and people turn to crime to keep a roof over their heads. Working out which borrowers, brokers, solicitors and valuers are vulnerable to fraud, not to mention if there’s an insider sitting behind an underwriter’s desk in your office, could save billions for lenders in the future. It is pleasing to see that the FSA is now grasping the nettle and getting really serious on cracking down on fraudsters but this alone will not stop the determined criminals.

2 June 2009
Barry Baigent from VA Mortgages wins online survey prize.
Exact: Latest News.

Barry Baigent of VA Mortgages in Hertfordshire has won a signed photograph of Steve Collins and Nigel Benn fighting in the epic World Championship boxing match in 1996, courtesy of Exact Mortgage Experts. Baigent knocked out over 530 other brokers who participated in Exact’s white paper research into the future performance of UK house prices to take the prize.

Alan Cleary, managing director of Exact mortgage experts, said, “In the housing market heyday, free prize draws were par for the course. Times are much tighter now and even modest competition prizes are rare. That’s why we’re pleased to be able to offer this sort of thing to brokers once in a while – it’s refreshing to have a bit of good news for a change.”

12 May 2009
Brokers Think House Prices Will Fall 9.2% Further
Exact: Latest News.

The average UK broker believes house prices have 9.2% further to fall, according to Exact’s latest white paper. Exact polled 539 mortgage intermediaries as part of their research into the future performance of UK house prices. 22% of brokers were less positive, believing we will see further house price deflation of between 10 and 20% before we reach the bottom of the market.

72%, the largest proportion of brokers surveyed, think house prices will continue on a downward path for the next six to twelve months. When asked about their clients’ sentiment, 57% of brokers said borrowers believed house prices had not troughed yet.

Alan Cleary, managing director of Exact mortgage experts, said, “Housing market commentators would have us believe green shoots have been springing up everywhere, but for those in the know about the UK mortgage market, sentiment hasn’t turned yet. House prices can’t recover until the mortgage market is fixed – and that’s some way off. Without the wholesale money markets, there isn’t enough cash to fund the kind of house buying which drove prices up in the past.”

Exact’s white paper research also reveals that 44% of brokers do not see lenders increasing their volume of lending for at least six to twelve months. 31% of brokers believed it more likely that lending volumes would take between a year and eighteen months to improve.

Alan Cleary continued, “Housing market commentators can make a song and dance about the odd blip in monthly house price indices, but the reality is, these blips are a dead cat bounce. Buyer interest might be improving as some commentators suggest, but interest won’t translate into housing transactions without mortgage finance. Gross lending is on track to hit around £150bn this year – that’s less than half the size of the mortgage market at its peak. Demand for housing may be growing, but without mortgage funding, the normal rules of supply and demand won’t come into play. Until lenders ease up their criteria and start to offer finance more freely, the lack of action in the housing market will push house prices down further. I’m expecting a 37% peak to trough fall.”

18th May 2009
High hopes for a speedy rebound.
Mortgage Strategy: Alan Cleary's column...
Exact's recent survey on house prices showed that whilst some housing commentators are predicting that spring is just around the corner, mortgage brokers and IFAs have a more cautious and balanced view. Exact received 539 responses to its survey which is a statistically significant sample. The headline figures showed that on average house prices have a further 9.2% to fall and that the bottom of the market will occur in the next 6 to 12 months
I am slightly more pessimistic as I believe there is another 15% to come off the house price indicies and the bottom I agree is 6 to 12 months off. Also in the survey 445 respondents out of 539 said that they did not believe that the government's ownership of banks would increase lending supply anytime soon, a view I share completely. Whatever green shoots are appearing the simple fact remains that unless people can get a mortgage, the housing market cannot recover.

More work needs to be done to stimulate appetite in the securitisation markets or we need to find a realistic alternative. However, if you take the more optimistic view from the facts and Exact's research it would suggest that we are well past the halfway stage. The best result for all of us is that we get to the bottom quickly and experience a V shaped recovery rather than a more painful U shape recovery.

11th May 2009
No surprises as rescue plans fail.
Mortgage Strategy: Alan Cleary's column...
The news that only one household has been saved from repossession by the government’s interventionist tactics may have surprised a few people, but the reality is that the schemes launched in December 2008 were little more than spin.
In my opinion the 2 year deferment of interest scheme was spinning so fast that it had created its own gravity field. There has been little interest from the banks and building societies to actually apply these schemes for one simple reason, they make no commercial sense. The government guarantee theoretically covers the lenders loss if after the deferral period the borrower ends up defaulting anyway. But, do the maths and you will see that the interest payments that could be deferred for some borrowers probably adds between 5 and 10% to the mortgage balance. Compare that to the potential drops in house prices that range from a further 10 to 30% and you can see that the risks to banks and building societies applying the government’s scheme is not a great commercial decision.

That’s why the banks that have bought into the schemes tend to be the ones that are owned or part owned by the taxpayer and that’s why only one household seems to have benefited. The message to the government is pretty simple, the banks and building societies are quite rightly more fearful about losing on negative HPI than they are positive about getting some interest underwritten by the government. As I said in Exact’s White Paper in December these schemes seem to be more about winning votes than saving the economy. I still hope I am wrong.

5th May 2009
Rating agencies methodology flawed.
Mortgage Strategy: Alan Cleary's column...
The furore over Moody's mass downgrade of building societies continues and the more I look into this the more I believe that the rating agency has over reacted. At the very least they have not gone deep enough into the asset quality of the building societies mortgage books. The view from Moody's that house prices could fall by 40% peak to trough is extreme but not impossible and therefore I believe that the financial stress testing based on this was valid and appropriate.
The part that does not make sense is that fairly high level assumptions have been made about loss severity especially in non conforming and commercial loans. The rating agencies methodology is in part based upon assumptions that loans behave in a similar way depending on product type. For example all BTL loans will behave the same despite the many different types of BTL investor. My experience is the exact opposite, having assessed nearly £4 billion of non conforming loans in the last 12 months the only way to accurately forecast losses is to do loan by loan analysis using up to date credit information.

High level assumptions are Okay in certain circumstances but not when the resulting ratings have such a negative impact on the market as a whole..