Several key lenders in the US have already fallen
The current stability of the mortgage market has been called into question with the news in the USA that several key lenders have gone bust in recent weeks and made 100s of employees redundant.
The possibility of a recession has been sounded, fuelled by the cost-of-living crisis, the pandemic and the war in Ukraine, among other factors. Confederation of British Industry (CBI), the business trade body, has significantly downgraded its GDP growth outlook to 3.7% in 2022, from 5.1% previously, and 1% in 2023 from 3% previously. UK inflation has played a large part in this, with it reaching a four-decade high once again as the Consumer Prices Index (CPI) rose by 9.4% annually in June, up from 9.1% in May.
“The demise of some mortgage lenders in the USA, such as First Guaranty and Sprout, was caused by them growing to a point where they were no longer able to nimbly control their operational costs,” explained Jason Berry (pictured), group sales director at Crystal Specialist Finance.
While they scaled up significantly since the last financial crash of 2008, Berry said they did not effectively consider how they could reverse this in periods of market downturn and so were caught out.
Berry said it is also worth remembering that the housing market crash, and subsequent financial crash in 2008, in the USA was caused by bad mortgage loans and poor underwriting.
“The current downturn is a result of wider inflationary pressures on homeowners, but it is nowhere near the self-inflicted national crisis it was back in 2008,” he added.
Read more: “The cost-of-living crisis is the biggest squeeze on living standards in decades”
In addition, he explained that the USA housing market is also much more diverse than the UK market, with pockets of significant growth and regression.
“Fast forward 14 years and, in the UK, we are in a very different position to 2008. If the USA catches a housing market sniffle, we will not be coming down with a heavy cold,” Berry said.
For example, he explained that the UK market’s regulation has tightened significantly and long gone are the days of 125% loan-to-value (LTV) and self cert mortgages. However, in reality, Berry said this type of consumer lending had nothing to do with the fall of some of the UK market’s major mortgage lenders at the time, such as HBOS.
In the USA, mortgages continue to be funded by institutional savings balances and if there is a ‘run’ on these savings balances, as tends to happen during economic downturn, Berry explained then the lender finds themselves in financial trouble.
In the UK and across Europe, lenders are now required to hold significant liquidity on their balance sheets, which Berry said enables them to ride out such eventualities.
Additionally, in the UK, Berry outlined that borrowers are also now heavily stress tested, to ensure that their incomes can withstand interest rate hikes and rising costs – again, he said, this protects the lender and indeed the borrower.
Read more: What can be done to take on the rising cost-of-living?
While the housing market has dampened somewhat in the UK, Berry believes it is unlikely to crash as supply and demand, with a heavy leaning on the demand, continues.
“Inflationary pressures in the UK are likely to be short term given they are primarily driven by the cost of petrol and energy to the consumer, and both lenders and borrowers are better prepared and equipped than previously to weather economic storms,” he added.
Energy bills have already risen significantly in 2022, with further increases expected in October, as well as January 2023, however it is believed prices will begin to decline over the course of next year.
“The question we should really be asking is, can the UK economy deliver sustainable, long-term growth?” questioned Berry.
Because without this, he explained that the UK could find itself in a longer-term period of recession, which will undoubtedly impact the housing market and those that fund it.
