Mortgages Uncovered

Well no matter what Sir James Crosby recommends in that final report on the mortgage market, it is more than likely there will be no fast return (to what seems like a long era ago) of the time when everyone seemed to enjoy easy money.

The ex HBOS boss was clear in his initial findings yesterday that his aim did not include reverting back to the conditions where loans were handed out (with great ease ) that were worth far more than the whole value of a property with apparent ease.

He admitting that treasury commissioned report was considering if it were necessary for the government, or effectively the tax payer, to help in funding guarantee bonds issued by big lenders, Sir Crosby also demonstrated the scale in the shortage of fresh funds for mortgage and home loans.
The interim report will have no recommendations added until the pre budget report in autumn shows the true impact of the credit crunch on lenders. Ten years ago, the top ten mortgage providers financed more than 70 percent of the home loans granted from savers’ deposits. By the end of 2007 it had fallen to 55 percent as lenders turned to the international finance market to package their mortgages into bonds bought by the international investors, mainly from the US.

Abbey National, owned by Santander, said on Tuesday it took almost 2 out of the 5 UK mortgages that were written in the second quarter, beating their largest rivals HBOS.

The lender, has managed to take advantage of the turmoil of mortgage rivals whilst they grapple during the impact of the closure of wholesale loan markets.

Whilst many banks have cut back their lending, Abbey wrote 15.9% of net new mortgage lending in the first ¼ of 08. Abbey’s share of net new mortgage lending in the next quarter accelerated to around 40%, giving it an overall total of around 25% for the first part of the year.

In spite of Abbey National’s growth spurt during this year, HBOS still remains the UK’s largest mortgage lender. It has 20% of all the home loans market and a loan book around £235 billion.

In the past 8 years Abbey’s share of the UK mortgage market fell from around 13% to 9% last year.
When Abbey takes over the Alliance & Leicester its market share will rise once again to about 13% and the combined loan book of the two will be about £153.3 billion.

The government are to face fresh pressure from financial lenders next week in a bid to ease funding conditions in the mortgage market when it is about to publish an interim report into the sector by Sir James Crosby, former HBOS chief executive.

The report which is due out on tomorrow is expected to set out a series of options for the government but will fall short of making any final recommendations.

The Council of Mortgage Lenders is one of the submissions to the report which has called on the government to grant new lending facility to banks along with the special liquidity scheme at the Bank of England that was introduced in April 08. This scheme allows lenders to exchange liquid assets based on mortgages issued prior to December 2007 for more of the liquid government bonds.

CML has also stated that it wants newer mortgages to be included within a new scheme that would be used as a type of secured loan with the Bank of England making it easier for lenders to raise finance.

A deadline of the autumn 2008 was given to Sir Crosby to produce his final report to be in time for the chancellor’s pre budget report. Sir Crosby was appointed by the chancellor, Alistair Darling, to chair a special group that would look at ways of boosting confidence back into the mortgage market, but since then the market has tightened even further.

Lending for home loans has shrunk by two 3rds as it becomes tougher for those lenders to raise the finance and become choosier about their customers. Data from the BBA this week showed that banks had granted 21,118 new mortgages within the last month, this is a drop of 67% year on year, the biggest fall since the body started collecting data in Sept 1997. This is having a huge impact on house prices, which are also rapidly falling.

Crosby’s working group were asked to look at ranges of options to boost the market which including broadening investor base for mortgage products plus boosting the issuance of covered bonds and as been expected to work with Bank of England, the FSA and the Treasury.

A spokesman at the Treasury has said that other options are being considered but any firm decisions have not been made.

With mortgage rates rising across the whole housing market, it is certainly refreshing to see a lender going for market share through the offering of a fee free remortgage.

NatWest will offer a 3 year step down tracker remortgage; this will be available to homeowners who have at least 10% equity in their properties, 90% loan to value. ‘Step down’ tracker means that the rate decreases every year of the mortgage term.

Customers have the added assurance that they can switch to fixed rate mortgages at any time after 3 months have elapsed. All of this is now being offered with ‘fee free’, i.e. this is with legal costs included as well as no arrangement fee.

Head of mortgages at NatWest, Andy Fell stated that during a time when the market is full of uncertainty and complexity, NatWest wanted to offer its customers a competitive and transparent deal. So with the abandonment of set up fees coupled with the downward stepping of interest rates, the bank are confident that their new deal will be popular with their remortgage customers.

One of the director’s at The Mortgage Provider Ltd said that prior to the credit crunch, people were spoilt for choice when lenders were falling over themselves to offer people fee free deals, in today’s market the recent NatWest announcement is very welcome.

The website Moneysupermarket.com which is the finance price comparison website, found that tracker mortgages, which track the Bank of England base rate, are making a definite comeback and look best value for money.

Research the website found that the gap in cost between a 2 year tracker mortgage and 2 year fixed mortgage has widened in the favour of the tracker deal which is currently at an average of 5.9% in comparison to 6.45% for a 2year fixed rate mortgage.

The moneysupermarket.com has a weekly credit crunch monitor which in this case showed there was little difference between the popularity of 2 mortgages at the beginning of June. However, there is now a 0.5% gap appearing.

The cost to take out the average tracker mortgage is currently at its cheapest level since March ’08; money supermarket is still reminding consumers to continue to scour the market for the best mortgage deals.

Louise Cuming who is head of mortgages at moneysupermarket said that it is understandable that consumers will turn to fixed rate deals in the current climate of uncertainty. However, data shows that it is still essential for consumers to look at all mortgages on offer on the market when looking for a new deal.

With such instability in interest rates the tracker mortgages have been avoided but economists now believe that rates will remain on hold short term with a reduction in the medium term.
If the widely expected happens by the end of the year and interest rates get cut, tracker mortgages could be a lifeline to many.

Mortgage approvals against house purchases have dropped to a new low in June, the fall was 66.4% compared with the same month last year, as figures from the British Bankers’ Association (BBA) show.

This annual fall is the biggest since BBA records started in September 1997 and shows that the continued downturn in the housing market is accelerating as lenders continue to restrict the granting of mortgages.

These figures come just a day after our government figures showed that the number of UK homes changing hands went down by 50% in June, highlighting the continuing difficulties that are faced by estate agents, homebuilders and retailers.

Director of statistics David Dooks from the BBA, commented that another record number of low mortgages that banks approve for purchasing houses will mean that the entire market is to become it’s least active since early 1990.

Although despite the decline in the amount of mortgage approvals, total lending rose by 3.8 billion in June which is an increase of 12% from last year’s figures. However, this is still the weakest rise since October 2007.

A downturn in the property market always feeds through to household finances as people are becoming more wary of spending on credit cards, according to the BBA. So this means that the pressure on household finances is starting to reflect in lower customer borrowing and personal loans and overdrafts are being cut back.

Credit-card borrowing remained subdued in June 08, with 7.3 billion spent on plastic, which is in line with the recent trend. Consumers have also repaid more than they have spent which continues the pattern of the past two years.

A mortgage lender is now offering a discount of 8% to homeowners who repay their mortgage earlier in a new sign of the turmoil that is gripping the mortgage market.

The sub-prime lender, Edeus is waiving all exit fees and early redemption charges for some borrowers who pay off their mortgage early on top of accepting between 92- 99% of the original loan as full payment.

So for example, borrowers offered the 8% discount would have to repay only £138K of a £150K loan.
The lender started piloting the scheme with 400 of their borrowers with buy to let loans or self-certified mortgages; it said that it would only extend the scheme to sub-prime borrowers if the pilot is a success.

Managing director of Edeus, Alan Cleary said that in the wake of the credit crunch lack of appetite amongst banks and indeed other investors for the mortgage-backed securities and whole loan books which the lender relies on has forced down the cost of such deals. He admits that the securitization market was dead and the bank were getting lower prices for loan books so they thought the best way to get money in was through the customer directly.

There are many sub-prime lenders who depend upon selling the mortgages they offer rather than retaining them on their own balance sheets and making money from interest payments.

No doubt that other lenders will be watching Edeus’s scheme closely. Another subprime lender, Kensington, said that it had no plans to follow suit though called it an “interesting development”.
Experts have pointed out that lack of funding in the mortgage market, especially for those with blemished credit records or with low equity in their homes may make it difficult for some borrowers to repay their loan and rival lenders may refuse to accept their custom.

Alan Cleary said the discounts they were offering were being calculated to help borrowers extend their equity, which may improve their chances of securing another deal.

This week Barclays also announced it was cutting mortgage rates by up to 0.35%, but only for borrowers with at least 40% or more equity in their homes.

Banks have to have the ability to re-market their mortgages. However, now that Fannie Mae and Freddie Mac have cut the number of mortgages they buy from banks, there are fewer mortgages available. Banks make a profit on each mortgage placed; it is a vital part of their monthly revenue stream. If the mortgage placement market were to shrink by twenty percent then that would represent a twenty percent drop in new mortgage placement revenues for the banks. This is a terrible time for banks as they start seeing decreasing mortgage revenues.

Wachovia announced exiting the mortgage market after declaring an 8.9 billion loss which goes to show how bad lending policies are putting some banks in a mess. All this is having a knock on effect world-wide.

Now people are beginning to worry what banks they should and shouldn’t invest in with stocks.
Latest UK house price data released by Rightmove show that the UK housing crash continues to increase by registering a fall of 1.8% for July. The rate of decent on a 12 month basis now extends to -11% and on a quarterly basis to -6.7%, which is far above the originally forecast crash rate of 5% per quarter as per analysis of Nov 2007 for the quarter April to June 08, which came in at -5.8%. The housing market is in full panic selling mode and property owners slashing prices are still met with silence from the potential home buyers.

On the small positive side, quarterly rate of decent of -6.7% is unsustainable as that would imply a 12 month crash of 26.8% which is far beyond anything that Britain has experienced in recorded house price history. Therefore this implies that rate of decent should start to moderate by the end of September 2008. Still there is potential for UK house prices to end the year down by more than 11% which is far more than original forecasts for a 12 month rate of decent of 7.5%, which was predicted before house prices started to drop following the August 2007 peak.

Data suggests though that house price falls will be skewed at the end of September 08, with the pace of decline moderating throughout 2009 and declining at a yearly rate of less than 5% by September 2009 because of the impact of high inflation, as inflation is eroding real terms housing market values whilst it’s supporting nominal house prices.

There is a clear indication that the UK housing market is in crash mode regardless of misleading mainstream headlines during late 07 and early 08.

Nationwide says rates will come down again by up to 0.46 per cent on some of its fixed rate and tracker mortgages as of 18 July.

Those unable to provide more than 10 percent deposit will see a smaller fall in rates.
The key to mortgage rates i.e. swap rates, have been very high until recent weeks, when they started to fall slightly.

Nationwide is cutting interest on 2 year fixed rate mortgages, for those paying a £599 fee, from 6.48 percent to 6.18 percent on a loan that is 75 percent of a property’s value. It is coming down from 6.88 percent to 6.58 percent for those who need a 90 percent loan to value mortgage deal.

Drew Wotherspoon, of John Charcol mortgage brokers, said the news would be a great relief to borrowers. He feels that as Nationwide is one of the country’s leading mortgage lenders and for them to take this much welcomed step it may be a sign of what is to come for the future.

Lenders still expect mortgage availability to remain tight though during the coming months, because of the immense effects of the credit crunch.

On 9 July, Nationwide cut its fixed rate and tracker deals for house buyers, 3 weeks after it raised mortgage rates by up to 0.5 percent.

As the fallout from the credit crunch continues, fixed rate mortgages have become very poor value, figures showed last week.

2 and 3 year fixed rates can cost almost £2K more than the cheapest discounted rate mortgage when the overall cost of a loan is taken into consideration, according to a statement made by Mform, the online mortgage broker.

Lenders have again and again increased mortgage rates over the past 12 months as the cost of securing funds on the money markets has risen higher and higher. This has now led to an unusual situation of fixed rate mortgages being nearly as high as standard variable rates, which are the rates that lenders normally charge when borrowers come to the end of a special deal fixed term.

Discounted variable rates have also increased, but Mform still say that they look better value.
HSBC has a 2 year discounted rate of 5.69%. On a £150K loan, the total cost over 2 years would be £25,414, assuming that interest rates do not change n that time. That is actually £1,882 less than £27,296 which a borrower with the same size mortgage would pay on the best 2yr fix rate, which is a 6.29% with NatWest or Royal Bank of Scotland, fixed for 25 mths, with a set up fee of £899.

The most competitive 3yr discount is from Woolwich, who charge 5.89% with no arrangement fees. On a £150K mortgage, the cost equates to £38,345 over 3 years.

The most competitive fixed rate over 3 years with Halifax, fixed at 4.49% over 13mths, then reverting to 7%. It has arrangement fees of £999 and costs £39,821 over the 3 years.

A further benefit of discounts is that they will often have lower set up and exit fees. This gives borrowers the flexibility of switching to a fixed rate at very low cost if better deals become available.
HSBC’s 2yr discount has exit fees of 2% in the first 12 months and 1% in the second. The 3 year discount from Woolwich has an exit fee of only £275.