The new look of the mortgage lending sector

Article source: David Smith - www.timesonline.co.uk
Sunday October 5, 2008

With the simultaneous down fall of the Northern Rock, Halifax Bank of Scotland (HBOS) and the Bradford and Bingley, the era of the high quality mortgage bank is no longer. All of the failed banks in question were previously building societies which subsequently became banks and failed. The difference between this credit crunch and the recession of the early 1990s is clear. Although the major mortgage lenders of Britain in suffered greatly in the 90’s they all survived the long recession in the housing market.

How will this affect the housing market currently? Over the past year we have seen a complete turn around in the fortunes of the housing market. What previously was a buoyant, liquid market, with high house prices and plenty of choice in terms of mortgage products has swiftly turned into something of a nightmare. What is needed now is a move away from trying to save the mortgage market, to one which concentrates on saving the financial system.

The final version of the Crosby Report, which looks into the housing market, addresses how to approach the financial situation which the country finds itself in; the report which was expected in mid October is now time tabled for the end of the month.

Up till now the former Chief Executive of Halifax Bank of Scotland has not been wasting his time, things have taken steps ahead. Saving the financial system has become a number one priority over looking for ways to bring mortgage money into the financial system. The markets have been responding well in this light and we have seen a brief period of intense market consolidation with the recent take over of the Bradford and Bingley as well as the impending take over of HBOS by Lloyds TSB.

What will be the effect of this for housing? To rephrase Nye Bevan, why look into the crystal ball when you can read the book? The most up to date figures for mortgage lending, from August provide a quick look into the future. The figures provided by the Bank of England, the UK Central Bank, prove that monthly approvals in August dropped 1000 from the previous month to reach 32,000, whilst this is only a slight drop on the month before it is a staggering 70 percent lower than the same time a year earlier. Most striking is that the total net mortgage lending figure was a mere £143 million, whilst July’s figure stood at £3 billion; net lending in August 2008 is down from £9.1 billion in the same month of the previous year. This, realistically, appears to be the shape of things we should expect in the future.

This level of national mortgage debt has been increasing from month to month for many years. Unusually, in the month of August the amount of money that house holds had as mortgage debts actually went down by a fraction; it slipped from ₤1,217 billion to ₤1,216. This is a significant fact and really highlights that there is a liquidity problem in the market.

Some city analysts expect this trend to continue for the foreseeable future. What does this mean? This means that as the mortgage markets continue to diminish and the number of mortgage approvals drop consumers will actually be paying the mortgage lender back more than they lend out.