Probability of bounce-back-ability in the mortgage market
Scott Thorpe is a director of The Money Group (TMG)
This may come back to bite us, but we wanted to try and give our thoughts on where TMG sees the market over the next 12 months.
The market is fast-moving and the goalposts could change at any given time. To prove that, I wrote this at 11am yesterday and by the time I’d finished we had to tweak two factors in – the changes on the furlough scheme and the approval for valuers to return to work.
We also understand that this will attract criticism and that is fine, you can’t be a futurist without sticking your neck on the block.
This is not a question about positivity or negativity – it is one of reality.
They say ask five brokers for their thoughts and you will end up with six opinions and with so many companies within our sector there will be a different version of events for every day of the year.
But, my preference is to err on the side of caution, prepare for the worst, hope for the best, and take any signs of progress that might come our way.
My initial feeling is that most lenders have already agreed to ride out the rest of 2020 and will only take baby steps over the next six months.
Speaking to experienced brokers across the industry the more sensible ones are taking the same approach. No point waiting for a bus if it’s been canceled. You may as well start walking.
The financial markets are still on a knife-edge and any risky lending strategy could lead to the lenders sitting on a huge number of properties in negative equity.
Couple this with an assumed rise in unemployment and it won’t be too long before banks are sitting with a huge pile of toxic debt on their books.
So, here are our thoughts as to what might happen, obviously we would love for a vaccine to be found and life to return to normal, but these are our thoughts in the real world, a prediction and subject to ridicule and which we are thick-skinned enough to accept!
We are off life support but still residents of intensive care
The good news, product transfers (PTs) will continue to grow but it may be that this is all that brokers have left when anything less than super-vanilla mortgages become too difficult to transact.
The criteria changes, the backlog of valuations, and the underlying health of the economy mean that people won’t be mortgaging for fun any time soon.
Therefore brokers without a long-standing client bank may now need to think about remodeling their business.
Release the valuers! Their welcome return will allow the lenders to continue to tweak criteria and loan-to-values (LTV’s) as well as reassess affordability and maximum loan amounts. However, these will still likely fall way short of where we were in February.
We do expect to see an increase in tentative enquiries now that the government has built a potential road map out of the current situation and given us a glimpse of a hopeful future. This should be enough for consumers to start dipping their toes back into a luke-warm market.
From a lender perspective, they will be loosely discussing the loosening of criteria and planning for the next stages of release but no one will be wanting to go out on a limb with any heart-attack criteria to try and steal a yard on their competitors.
We have been discharged from hospital
The government furlough scheme has given a stay of execution to what potentially could have been a blood bath for the country. Hopefully, this move may allow companies to slowly bring staff back and potentially keep hold of certain members of staff that would have been made redundant if the scheme had not been extended, however, the government will be wanting businesses to part-fund this and depending on the amount we could see an increase in redundancies at this point.
Now that valuers and ancillary property transaction businesses are back at the coal face we should hopefully see a return to chains completing – ELEPHANT IN THE ROOM KLAXON – providing those in the chains remain confident in their own position.
Unfortunately, maybe 10-15% of deals that were submitted pre-crisis will not be going anywhere. What made sense to lenders three months ago will make little sense to some lenders today.
The general public begins to return to work in ever-increasing numbers as child-care issues dissipate. The industry begins the tackle and unwind the huge backlog of existing and new enquiries.
Uh oh – We’re back in the hospital
To me, this is the trickiest period and potentially the one that could define where our whole sector will go in the future.
Now could be when we see redundancies start to bite and the mental welfare of the nation will be at an all-time low as businesses fail and the repercussions and collateral damage of the whole crisis can start to be assessed.
Lenders will be sat firmly on their hands, they may be generous and quick with dishing out government money but they won’t be doing the same when it comes to their own.
It is inevitable that property prices will decrease and no longer can we rely on hope and prayer to sustain them.
The end of the furlough scheme is upon us and the realisation for many is that the scheme has simply staved off redundancy for a few months. This will have lasting consequences on employment trends, house prices, and mortgage ability.
For those specialist lenders still operating they could start to see an increase in cost for raising capital as the markets start to price in risk.
Convalescing at home, chicken soup and knee blankets for all
We would now expect the market to be nearly bottomed out. The threat of redundancy for those people still in employment will have eased.
As a result, property prices will become less volatile and less vulnerable to bad news as we all begin to price in the “new normal” .
This will have a positive knock-on effect for lenders to begin to feel more secure in launching new products and create some competitiveness within the sector.
Securitisation might become easier for the specialist lenders which could see that part of the market begin to reopen.
Life returns to whatever “normal” is
Government incentives are in place to put people back into work – think Roosevelt’s ‘New Deal’ but on steroids. There will be fresh incentives for the housing market and we can expect HTB and Shared ownership to again become a focal point. Lenders will be out in force to re-establish their lost market share.
June will also start to see the self-employed and limited companies that made it through deciding whether to repay their Coronavirus Business Interruption Scheme Loans (CBILS) and bounce back loans or commit to servicing the debt.
Either way brokers can expect a surge in enquiries as the self-employed look to consolidate this debt on to their property.
This is where the ease at which some people took a mortgage payment holiday may now come back to bite them. The lenders will have totally rebuilt their algorithms by now and they won’t forget how easily some borrowers ran out of money in the first place.
June 2021 and beyond
The boffins find a vaccine which along with global unification on testing, tracing, and isolating the world’s population we can all begin to crawl out into a new beginning.
As Darwin said many times, it is not the strongest that always survive, but those that adapted the quickest and the best.
What could derail progress or speed it up?
Increased payment holidays – Any extension on mortgage payment holidays will have huge implications on the specialist lenders and likely to put back any return to the market for some of them. Depending on their model, we might also see some lenders close their doors completely.
It may be time for the government and the Bank of England to assess a way for lenders without a banking license to access capital directly from them and avoid the choppy and shark-infested money markets.
On the lending side lenders are taking payment holidays into consideration when looking at the viability to lend.
Furlough – It will play a massive part in how the economy rides out this storm. But it comes with consequences. What appetite will lenders have with 7.5 Million people partaking in the scheme? Many of these jobs and accompanying sectors will be classed as high risk and clearly the lenders will be thinking long and hard about exactly who they will want to lend to.
A cure – Fingers crossed this comes in but when and how effectively it can be rolled out remains to be seen
How we see each different type of market
Purchase’s – It would be madness for a lender to go above 90% LTV this year and we suspect they already know this. Throw in some adverse credit and a mortgage payment holiday and while you might have the deposit available to purchase it is irrelevant if the lender thinks your income is not enough.
Product transfers – A lot of clients will want to ride out the market and opt for security. Many will put off a future move for at least 12 months and until such time they get visibility on their own job security. This will be the only growth aspect of the mortgage for the rest of the year and lenders will also use the opportunity to go direct to consumer at every possible opportunity and brokers need to remain vigilant to that threat and ensure clients sense check everything they are doing.
Like for like remortgages – Expect these to be few and far between. Unless there is a significant difference in monthly payments between the PT and mortgages we believe clients will go down the path of least resistance.
Shared ownership/HTB – Unless you are a super-prime client with a large deposit these products will stall well into next year
New builds – This is interesting a lot of people will have exchanged so expect to see a spike in completions In June, but with lenders not offering high LTV, there needs to be some serious thought surrounding new build incentives in order for the deals to go through. Builders may mothball developments and ride out the storm into next year.
Later life lending – The market will dramatically increase with the bank of Mum and Dad (or Gran and Grandad) now needed more than ever as a lending source. We expect to see many future inheritances requested early by the family.
Second charge mortgages – A backlog in cases on hold and delays by lenders coming back to the market will see a large surge In completions in June/July.
There may be incremental increase’s month on month thereafter with new enquiries coming in from brokers and consumers alike who are unable to get financing elsewhere.
But there will still be constraint on criteria and certain lenders may not re-enter the market till the end of the year, with some pulling out all together. Some larger second charge packagers may need to scale back operations until such time the market recovers.
Bridging – It continues to be all about the exit. The regulated space will take a long time to return to any sort of normality with nervousness centered around valuations.
In the unregulated space, we could actually see some normality, with lenders showing a common-sense approach by manually underwriting each case. There will not be a shortage of capital for these lenders. In the main they are privately funded so there could be an appetite here although expect an increase in rates to accommodate the additional risk being undertaken.
Unsecured lending – The days are now gone for cheap unsecured borrowing. It may come back towards the end of the year but it will only be for the prime consumer. The middle tier client will either have to look at much heavier rates from lenders or go down a secured lending route.