In yesterday’s Financial Stability Report, Carney outlined the Financial Policy Committee’s intentions to monitor underwriting standards, influence affordability stress-testing and announced the end of the Funding for Lending Scheme for household lending.
The Bank’s move to exert centralised control of lending institutions should the market begin to show signs of over-heating has been labelled a “brave call”. Mortgage Introducer asked the industry to give its opinion on Carney’s toolkit of controls.
The end of FLS for household lending
Ben Thompson, managing director of Legal & General Mortgage Club
The withdrawal of FLS should be seen both as encouraging news and also perhaps a historical moment. There has been much talk of new powers to prevent overly rampant mortgage lending and house price growth but many will have wondered if this was just noise. It clearly isn't.
Equally, it is a good thing that the prevention button is being pushed as well. This marks a sea change for the housing and mortgage markets under Mark Carney and suggests attempts are being made to avoid a return to boom and bust.
Many will like the fact that FLS is being removed because although lots of mortgage borrowers have benefited substantially from the scheme over the last 18 months it is also the banks that have enjoyed the benefits and that isn't always popular given how the last half a decade has played out.
Leaving the Help to Buy schemes in place therefore feels right as it was really FLS not Help to Buy that properly got things moving again a year ago.
But Help to Buy continues to stoke demand and yet still we see little evidence of proper government policy to tackle the chronic housing supply shortage. If that was committed to, over a sustained period of time, schemes such as Help to Buy would arguably not be required as demand and supply would be more equal.
It is good that action has been taken early especially if the funding markets can seamlessly and painlessly take over from where FLS departs. But many will wonder at the transparency of the apparent short-term politics surrounding this whole topic where what we really need is longer-term and more sustainable policy, dedicated to building more new homes in the right parts of the country to meet increasing demand.
Angel Mas, president of Mortgage Insurance Europe at Genworth
It is understandable that in a growing house price environment the Bank of England is keen not to revisit the boom and crash housing market scenarios of the past and is looking for certainty and stability.
The withdrawal of the Funding for Lending Scheme for lenders to use for mortgages is a significant step and the Bank is effectively asserting that the market needs to move back towards a more normalised funding footing.
However, Help to Buy is the next cab on the rank as far as government support for the market is concerned and we believe this is a strong concept as it addresses the need to provide solvent borrowers - who only have small deposits or equity levels - with access to mortgage credit.
It is however important that a level playing field exists so that private insurance schemes, many of them utilised by building societies, can continue to run alongside Help to Buy allowing lenders which do not wish to be part of a government scheme to continue to offer products in the higher LTV range.
By creating this type of environment the Bank and regulators will be doing a great deal to promote the availability of much needed mortgage credit for first-time buyers in areas outside of London who still require support and are a long way from overheating.
92% of our current book is based outside London and the mortgages we protect are for properties priced on average at £160k.Therefore private insurance, if used within adequately designed schemes, is a credible option for lenders without fuelling any kind of bubble.
FLS refocus on SMEs
Adam Tyler, chief executive of the National Association of Commercial Finance Brokers
Despite improving credit conditions and an upturn in monthly gross lending, entrepreneurs are accustomed to seeing total borrowing figures fall each month with £2.7bn wiped off the total value of SME loans and overdrafts since July.
At a time when business growth should be top of the agenda, the downward trajectory of SME borrowing is the opposite of what’s needed. As well as opening up new lines of credit supply, it’s also vital we make funding access as simple as possible for small businesses. Now public confidence about access to mortgages has been transformed, it’s time to reassure small businesses that help is at hand.
Renewed commitment from the Treasury and Bank of England to the SME cause should improve the overall outlook, but regional and local activity is equally important to make significant headway.
Alexander Jackman, head of policy at the Forum of Private Business
The government is right to refocus the FLS policy. Not only will it cool down fears around the mortgage sector but more importantly it will focus the finance on the real need in the economy, on our growing small businesses.
Banks’ reputations have taken further damage this week but we stress to all businesses that money should be there for lending.
FPC influence over stress-testing and underwriting
David Copland, director of mortgage services for LSL’s financial services division
While we now all expect to see a rise in lending rates every month the Bank of England is alert to rapidly rising house prices and is ready and waiting with a number of tools to counter any future housing bubble and maintain stability in the housing market – which may well result in reduced completions in the third quarter of next year.
In its Financial Stability Report out yesterday, the impending legislation of the MMR and in particular the rules around affordability and income verification are mentioned. The report also talks about the possibility of being more prescriptive over interest rate stress-testing even more so than the ruling under MMR which requires lenders to use future market pricing over a minimum of five years.
The report also mentions other tools that could be introduced if the market looks like overheating such as maximum loan to values, loan to income and loan to debt ratios although I don’t think there will be a need for them to use any of these in the short term.
In addition, the report mentions the loosening of underwriting standards as a feature of previous housing bubbles and suggests that the Bank will mitigate this risk by the use of intensive supervision in order to maintain underwriting standards.
I do however predict further reductions in conversion ratios as lenders test their MMR readiness over the coming months; this is likely to have a downward effect on completion volumes in the third quarter of 2014 - whether it will be material or not is another question.
Karen Bennett, sales and marketing director of commercial mortgage at Shawbrook
We believe strongly in the need for a long term, sustainable market – the financial crisis has shown all market participants just how devastating it is when liquidity disappears.
For some time we have been vocal about the risks posed by customers, brokers and lenders getting used to life support interest rate levels. Most commercial lenders have adopted stressed interest rate assumptions in their affordability assessments as good practice although worryingly we have recently seen some that don’t, and of course the retail buy-to-let market also uses pay rate.
Therefore we welcome the guidance from the Governor and believe it is an incredibly important message for the industry.
