With notable US mortgage lenders going bust what does the future hold for the UK market?
In recent weeks several key mortgage lenders in America have gone bust, including First Guaranty and Sprout, which resulted in 100s of employees losing their jobs overnight.
The possibility of a recession has been heard loud and clear across the industry, linked in part to the cost-of-living crisis, the war in Ukraine, the pandemic, and raising inflation, among other contributing factors.
The UK too has been far from immune - inflation has continued to push past its 40-year high, with the latest Consumer Prices Index (CPI) reporting a 9.4% rise annually in June. This is on top of rising interest rates ,with the Bank of England upping the rate at consecutive Monetary Policy Committee (MPC) meetings, resulting in the latest rise putting the base rate at 1.25%.
So is the UK likely to follow America’s lead and see a host of mortgage market layoffs?
“I do not think even Mystic Meg could confidently make predictions about interest rates, house prices and the mortgage market at the moment, but there is some truth in the saying that ‘when America sneezes, the world catches a cold’,” said Joanne Leek (pictured), marketing manager of mortgages at Suffolk Building Society.
Leek stated that the financial crisis of 2008 is at the front of people’s mind as inflation rises and the base rate creeps up, with all eyes on the US economy. However, she noted that the mortgage market in the UK is much more regulated than it was prior to the crash and many organisations, including Suffolk Building Society, have shored up their processes and governance to make sure operations run as prudently and efficiently as possible.
In particular, Leek said lenders have re-evaluated risk management and it is now at the front and centre of analysis and decision-making.
Two sides of the coin
“Let us not forget there are two core elements of the mortgage market, purchases and remortgages,” she added.
According to Leek, with the demand for quality housing still far outstripping supply, she believes it is unlikely there will be a significant impact to the purchase market.
“In fact, one of Boris Johnson’s last speeches as Prime Minister stated a desire to build ‘more of the right homes in the right places’, announcing plans for helping young people and those on housing benefits into homeownership,” Leek said.
Yet, she noted that the government is still falling short of housebuilding targets meaning demand is outstripping supply. The government revealed in its 2019 Conservative manifesto, that it plans to build 300,000 homes a year by the mid-2020s, however it has fallen short every year since. In 2019-20 there were 242,700 net additional dwellings, which fell to 216,490 in 2020-21, partly due to the pandemic.
“In terms of the remortgaging market, the rising cost-of-living and the Bank of England base rate increases mean more people are keen to remortgage and make sure they are on the best possible deal,” Leek said.
She explained that borrower inertia is costly to household finances which is why she thinks more people are likely to remortgage, and perhaps remortgage early rather than revert to their lender’s Standard Variable Rate (SVR).
Read more: “The cost-of-living crisis is the biggest squeeze on living standards in decades”
“A collapse along the lines of 2008 is unlikely for the reasons above. However, there will be more caution in the market,” Leek added.
Mortgage approvals as a whole are slowing, and Leek believes valuations may fall but noted that after the removal of the stamp duty holiday during the pandemic, house prices escalated to such a level that a cooling off is not necessarily a tolling bell.
She believes one particular vulnerability which may be seen going forward could be the removal of compulsory stress testing for affordability, but she said that if lenders continue to be responsible with their lending decisions, and stay within the loan to income flow limit, the risk will be mitigated.
“In short, there are some factors that could tip the scales in either direction but as a small island with a shortage of housing stock, the mortgage market has less to be concerned about than in the US,” she concluded.
