No safety net

Nia Williams

May 1, 2009

I have no qualms that composing and delivering Budget 2009 was a thankless task. Due to the worldwide economic downturn and Government spending over the last decade, we had the Chancellor of the Exchequer on a high-wire between Big Ben and Downing Street performing an incredible balancing act, but with no safety net.

That said, I must take issue with the so-called facts as delivered by Alistair Darling, his seeming inability to understand bank lending policy, and his lack of support for businesses, especially SMEs.

Figures

Let’s start with the figures. On the one hand, the Chancellor says it will be all over by Christmas with Gross Domestic Product (GDP) at minus 3.5 per cent in 2009, plus 1.25 per cent in 2010 and plus 3.5 per cent in 2011. However, the International Monetary Fund (IMF) says the British economy will shrink by 0.4 per cent next year.

Someone has got it totally wrong, and it is fair to say that the IMF has not got to win an election next year. On top of this, the first quarter’s figures for the UK in 2009 already show the Chancellor’s estimate to be wrong, and this comes literally days after the Budget was delivered.

Lending

In terms of lending, we have market intelligence that clearly indicates that commercial lending will halve in 2009. All throughout the UK there are existing successful businesses to viable start-up companies, and everyone is struggling to raise finance because there are only a handful of commercial mortgage products available.

So what does this mean for the banking system and how did Budget 2009 expertly fail?

Of those products that are available in the market, most of these are hard to drawdown as the lending criteria is aimed purely at prime applicants, due essentially to limited inter-bank lending and the difficulty in selling on mortgage backed securities, thus limiting the money supply. This leaves a sector of SMEs, entrepreneurs and investors with little scope to pursue or develop a wide range of business activities without resorting to higher rate sub-prime borrowing – assuming they can get that!

Banking

Darling failed to mention this issue whatsoever so, as before, the banks remain reluctant to lend and there is virtually nowhere for businesses to turn. To a large extent the banking system has brought about it’s own difficulties by imagining that the money merry-go-round would never end but it has virtually stopped due to non-saleability of mortgage paper.

This is a now a solid fact that has to be recognised and continuing to blame the banks for not lending to businesses does not cure the problem. After all, if the banks lend irresponsibly to businesses that either can’t afford it or have no tangible future prospect, wouldn’t this further damage the banking system?

Stuck

With standard commercial mortgages typically priced at 4 per cent over Bank of England base rate – when they can be agreed, and sub-prime mortgages around 15 per cent – many businesses find themselves stuck between a rock and a hard place.

Until the Chancellor and the banking industry addresses this issue, which I fear will not be for the foreseeable future as this will take some time to fix, possible business success stories are being stifled and the country itself will not be able to start down the road to recovery. (As for whether quantitative easing will work, only time will tell but that is a different argument for a different day.)

Help

Yet, strangely, other sectors were mentioned and received significant news in the Budget. The housing market should now have bottomed and is about to be boosted by a huge Government injection of cash for stalled building projects, which has been warmly welcomed by Barrett Homes, Taylor Wimpey and other firms.

Repossessions should fall due to extended help with mortgage payments for those that have lost their jobs as a result of the worldwide economic downturn, and we had three months where we have witnessed a small increase in house prices and mortgage activity.

With the news of mortgage lending in March being 16 per cent up on February there is talk of recovery or even green shoots, but it is still early days.

Financial support

Two other major announcements also stood out. The automotive sector had its car scrapping scheme and environmentalists were handed an extra £1 billion to combat climate change by supporting low-carbon industries. Now correct me if I’m wrong, but it seems to be the case of he who screams loudest gets the attention and the money.

As an industry we must continue to push so our concerns are heard and addressed, but until that time we must move onwards and upwards and make the best of the limited situation.

This ultimately moves onto the questions of what it all means to the intermediary or broker who has traditionally relied on the residential mortgage market?

Movement

At least it appears that there is some movement in the residential mortgage sector which could provide some relief but more is needed so does it make some financial sense for the broker to explore the commercial mortgage market? It is something of a minefield and many prime and non-prime deals can be declined in the present market climate but this route of profit sourcing is well worth the journey.

So, in conclusion, how exactly how do businesses move forward at this moment in time and where do they turn? There are still providers out there who can help, albeit a smaller number. For instance we offer near-prime commercial mortgages that considers applications based on current payment ability over the more traditional serviceability checks, which may cause applications to be declined by banks.

When a Budget filled with doom and gloom for the commercial mortgage sector and the Government playing Russian roulette, it makes sense to identify opportunities. The game is in play and, at least until after the election, the commercial mortgage near-prime window is open.


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