A plea for innovative lenders

Tony Ward

May 4, 2017

Tony Ward is chief executive of Clayton Euro Risk

Apologies upfront. Don’t think I don’t hear your groans. It’s back to my favourite topic: the housing market – and we’re starting with the politics.

Following my call for the main parties to make housing a priority in their election manifestos, ‘the dysfunctional housing market’ is back in the headlines. Labour leader Jeremy Corbyn is promising to build one million new homes in the next five years, including 500,000 council properties, if he becomes Prime Minister. We have yet to see the Conservatives response – if any – when their manifesto is launched, but the housing crisis is gaining traction in the media.

Mortgage market holds steady in August

Last week, I joined a panel discussion at Fitch Ratings’ European Structured Finance seminar. Understandably, the state of the UK housing market was top of the agenda. The view from the panel was that we were in a bit of a pickle. It was acknowledged that the recent government white paper on housing contained some helpful suggestions, but this was not nearly enough in isolation and ‘more of everything was needed for a long time’.

One of the big issues discussed was the level of housing transactions. These have fallen off a cliff of late. Hardly surprising. Many at the conference agreed that this, more than house prices, was determining the market’s health.

Interestingly, the CML announced that they were undertaking research into transaction levels and their associated impact, so those findings will make for interesting reading.

Housing supply is clearly part of the problem, but the politicians will need to do a lot more to help homemovers, too.

They are in decline and showing no meaningful recovery since the credit crunch. But where is the incentive?

Macroprudential policy has definitely played a role in this and is now being seen by many as a constraint. While the intention has been good, has it all gone too far?

Buy-to-let has had a slew of interventions from both politicians and regulators recently; these have dampened the market but to what extent? In terms of defaults, it can be argued that buy-to-let investors are more prepared for downturns and have buffers in place to withstand pressures – more so than residential borrowers. This can be seen in the hard data which shows that residential borrowers’ defaults are far higher than their buy-to-let counterparts. So why so much regulation all at once? The CML expects the buy-to-let market to be subdued for a while now as amateur landlords exit the market. But is this really where we want to be?

My panel discussion focussed on new lenders and opportunities. There seems to me to be an entire swathe of the population that is now poorly served by the mortgage market. The 2014 Mortgage Market Review did many good things in tightening up rules but the result is that segments of society find it virtually impossible to obtain a mortgage. Self-certification mortgages are extinct and a subprime mortgage is still regarded as a pariah. My view is that the risks associated with these products are fundamentally misunderstood: with the proper checks and balances and risk management in place, these products have a valid role to play and address the needs of underserved borrowers without compromising conduct issues.

Of course, mainstream lenders are no longer concentrating on market share. Instead, they are focusing on their balance sheets because their margins and capital are under so much pressure. Increased regulation of the big lenders has also led to commoditisation of products and industrialisations of processes so don’t expect much in the way of innovation here. Perhaps it’s going to fall to the challenger banks and marketplace lenders to find a new way of lending to those disenfranchised sections of society – and in so doing, drive up those transaction levels.

There is a genuine need for new lenders and products. They could just prove to be the game changers we so desperately need.

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