BY: Peter Beaumont, Deputy CEO, Mortgages plc
The UK mortgage market is not only one of the largest in Europe, but also one of the largest in the world.
The latest figures issued by the Council of Mortgage Lenders (CML) sheds light on just how vibrant the UK mortgage market is. Gross mortgage lending hit a new record in August reaching £32.7 billion, which is 7.2 per cent higher than the £30 billion of lending in July, and 21 per cent higher than the £26.9 billion lent in the same month last year. It also beats the previous record set in June, of £32.4 billion.
In total, there are 11.6 million mortgages in the UK, with loans worth over £1 trillion. What’s more, the government is happy to see this figure rise still further, as it pursues its objective of increasing the level of home ownership to more than 70 per cent of the UK population.
However, take a look at another set of CML statistics, and you quickly realise that the UK mortgage market is not the sole preserve of UK lenders. An increasing number of lenders active in the UK mortgage market are backed by foreign financial institutions, with the US, Europe and Australia being well represented.
What’s more, the Financial Services Authority (FSA) has confirmed it has received 28 applications from prospective new lenders intending to enter the UK mortgage market during 2006. Not all of these will be foreign owned, but it is a fair guess that a reasonable number of them will be.
There’s nothing new in foreign banks showing an interest in the UK mortgage market. Foreign financial institutions have been active lenders in the UK since the 1980s and although many of these organisations have focused their attention on the non-conforming sector, don’t make the mistake of thinking they are small players. A significant number of them are among the top 30 largest lenders both by volume of new business and total asset size.
If the going gets tough...
Despite the significant number and size of foreign banks in the UK, some people in the industry still question their long-term commitment. They point, in evidence, to the way in which a number of overseas lenders entered the market in the halcyon days on the mid-1980s when property prices were growing at breakneck speed under the influence of a Thatcher’s government (do you remember tax relief on mortgage interest and life policies?), only to pull out when the market took a nose dive in the early 1990s. There is clearly a concern that history could repeat itself and that foreign banks could turn tail and run if the going gets tough, once again.
However, the comparison with the late 80s and early 90s is not a fair one. Not only has the economic climate and state of the housing market changed markedly, but most foreign institutions are also taking a fundamentally different approach to the way in which they are building their presence in the UK.
Look back at the late 80s and early 90s and the economy went through a classic boom and bust recessionary cycle. After the good times of the 1980s, recession hit and house prices collapsed in many regions. Unemployment also rose rapidly – almost as quickly as interest rates. Today, the economy is in a far healthier state. Inflation and interest rates remain low, unemployment has risen slightly but the number of people claiming Jobseekers’ Allowance benefits is still below the one million mark and although house price growth has slowed it is on target to be about 7 per cent this year.
Foreign banks therefore view the UK economy as being strong and stable and the UK housing market as being in exceptional good health. What’s more, banks such as Merrill Lynch view their residential mortgage business in the UK as part of a global enterprise, in which vertical integration of business is a key objective. Vertical integration means the bank is involved in every aspect of the mortgage chain from product development, through to origination, financing and securitisation.
In the UK, Merrill Lynch already owns Mortgages plc and has recently acquired Freedom Lending. Merrill Lynch’s objective is to pursue a multi-brand strategy with both Mortgages plc and Freedom Lending sitting side-by-side in the market, but occupying different parts of the credit spectrum. Mortgages plc is primarily a non-conforming lender, with Freedom Lending targeting prime niche’s such as buy-to-let and self-certification. There is and will continue to be, overlap between the two lenders as they both extend their product offering both up and down the credit curve, but the degree to which the two brands compete head-to-head is almost non-existent.
Taking a long-term view
To compete in the UK mortgage market, foreign banks have to take a long-term view of their investment. This is no longer a market in which competitors can enter and retreat at very short notice. The demands of statutory regulation and fierce competition for market share both mean significant investments in staff, training, infrastructure and technology have to be incurred.
Technology, in particular, holds many of the ingredients for success as it can speed up processing times, reduce processing costs and deliver a more reliable service to end users – which includes borrowers, intermediaries and packagers.
However, the scale of the investment in technology is measured in millions of pounds; it is not the sort of expenditure incurred by an organisation which may possibly pull out of the market at some point in the future. The same goes for the expenditure which is now required on sales and marketing activities. Most lenders spend millions each year supporting large teams of business development managers (BDMs) and implementing advertising and promotional campaigns. Again, the market is one which demands long-term investment.
Winners and losers
One of the key issues for the future is who the winners and losers will be. Having the backing of a major financial institution, be it foreign or British, is a significant advantage and I suspect that many independent small lenders will find the going increasingly tough without significant financial backing behind them. It is probable therefore that we will see continued consolidation among lenders, a process which has been ongoing for many years.
Virtually all lenders have ambitious targets for future growth. It would be interesting for a publication such as Mortgage Introducer to ask chief executives to state their volume targets for the year ahead. If everyone were willing to reveal such confidential information (which they probably would not), I suspect the total figure for all lenders would be at least twice as large as the size of the market. Not every organisation will be able to be a winner. However, it should not be assumed that the more recent lenders to the market will be those who struggle most.
Many new lenders (by which I mean those who have entered the market within the last 10 years) have substantial financial backing, experienced management teams and a detailed understanding of the market. They have proven to be innovative and able to exploit opportunities quickly. They are likely to be among the winners. You only have to look at the growth records of companies to see tangible evidence of the way in which relatively new companies (in mortgage market terms) have been able to thrive and prosper.
Although the UK mortgage market may well be dominated by domestic lenders for the foreseeable future, new lenders, particularly those with substantial backing from international investment banks, will increasingly make their mark.
