November 16, 2012

Frank Eve is managing director of Frank Eve Consulting


My daughter is currently studying the genre of ‘horror’ as part of her Film studies course which lead me to thinking of a rather interesting analogy with the current mortgage market. The mortgage market continues to be in a ‘zombie like’ state with a lack of growth and struggle for any real volume or momentum. The zombies in the mortgage market are created when banks, companies or consumers suck resources and funding out of the system without returning anything back to support the economy or wealth creation.

Zombie banks take cheap funding from the Government via low interest rates and Quantitative Easing (QE) but fail to pass the benefit through to business, the economy or consumers that need it. They use up scarce resources and funding to shore up balance sheets and build their capital base for the losses they still need to take.  Zombie companies continue to trade as a result of support from zombie banks which can’t afford to take the loss if the company defaults on their debt.  These subsidised zombie companies compete with healthy companies and take valuable market share. Zombie borrowers are kept in houses they can’t afford as a result of government schemes and lender forbearance. All this sucks out funding, resources and support that the economy needs to create real wealth and new prosperity.

Fighting a zombie is not easy, as any film buff knows, they just keep coming, they are resistant to most weapons and there is always a heavy cost to their ultimate destruction. The zombies in the UK mortgage market have government backing so they can hold on for a very long time, but they must eventually be defeated. In all the best zombie films their ultimate defeat is assured when their central life force is switch off or the hero finds an antidote.

So, from a mortgage market perspective that means that ‘mortgage market  zombie land’ will only change when the zombies life support systems are switch off so, QE has to stopped, interest rates need  to rise and house prices adjust. If house prices were adjusted and healthy banks returned to their true function of transferring resources from savers to borrowers we could see more support to the areas that need it: first time buyers, 95% house purchase and a healthy re-mortgage market.

The solution to ‘mortgage market zombie land’ is therefore clear, but it will mean we still have some pain to take and we might only be half way through the crisis.

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