We undertook detailed discussions with members at the start of the year and as we prepare for what is sure to be a busy autumn of policy (and political) initiatives – it is time to review those policy themes. Has our view of them been modified by events? Did we pick the right ones? And have we seen the emergence of important new policy themes?
One of the key factors in helping to decide our policy priorities was our view of what the market would look like in 2014. In our forecasts published at the start of the year, we believed that improving economic conditions would continue to support what appeared to be the beginning of a strong recovery in the housing market, but from a low base. But we did not agree with those media commentators who believed that the recovery amounted to a housing "boom".
Our view was that over time affordability pressures, accentuated by the move to a new regulatory environment, were likely to ensure that housing market activity eased back of its own accord – especially when factoring in the prospect of higher interest rates in the medium term.
At the start of the year, we were unsure about the extent to which lending volumes would be affected by the Help to Buy mortgage guarantee, which at that stage had been operating only since October 2013, or for just two months. Our view at the start of the year, however, was that some commentators were over-stating the impact of the guarantee scheme. The initiative was primarily aimed at encouraging more lending at higher loan-to-value ratios, and this was already beginning to happen in the market anyway.
Overall, lending figures this year have been stronger than we originally expected, and we recently revised upwards our forecasts for activity this year. Our predictions for UK property transactions (at 1,230,000), and gross and net lending (£208 billion and £20 billion respectively) are all now higher than at the beginning of year. We also expect mortgage arrears and possession to be lower than originally predicted.
So, what were the policy themes we identified at the start of this year? And, against the evolving market backdrop, how has our view of them been modified by events?
Help to Buy
At the start of the year, we believed that the mortgage guarantee scheme in particular would generate a significant amount of work, partly because it had been introduced only two months previously.
Back in January, we anticipated a significant workload in monitoring the operation of Help to Buy, helping to iron out any glitches in the scheme, and providing commentary on its effects on the market. The launch of the mortgage guarantee in particular, and questions about how it might affect the UK economy and financial stability, put the mortgage industry at the forefront of political and economic debate in the early weeks of the year.
Verdict: As more data on Help to Buy has been published over time, it has become clearer that it is helping borrowers in the way intended. Take-up has been mainly by those buying lower-priced homes, spread across the UK – and there is no real evidence that it is pushing up prices in the market unacceptably, in London or elsewhere.
The scheme is now very much part of "business as usual" for lenders, while political focus has temporarily decreased. Concern about how the industry will exit from the scheme has abated, but there is still a need to avoid causing unnecessary market disruption when it is withdrawn in the future.
The politics of housing
At the start of the year, we believed we were heading for a general election in which housing issues would be a high priority for all major political parties. That is still our view. Each party has been working on policy development this year as expected, but on a range of options far wider than existing schemes and lending for owner-occupation.
We are anticipating further development of policies extending into areas such as shared ownership and shared equity, the shape and regulation of the private rented sector and security for tenants, and ways of stimulating and funding the construction of new homes that are also affordable. On behalf of the industry, we foresaw a need to engage in all these discussions.
Verdict: The parties have kept most of their thought to themselves for now, but the party conference season will herald new announcements and a pick-up in the pace of policy development. We have been focusing on building the right relationships with policy and political contacts, and will step these up in the autumn.
Relations with the Financial Conduct Authority
As ever, the Financial Conduct Authority (FCA) was the regulator with which we expected to continue to have the most contact at the beginning of this year – particularly with implementation of mortgage market review (MMR) in the spring. We anticipated that the introduction of the MMR would produce some unintended consequences, and were ready to monitor and address these on behalf of lenders.
However, we did not expect our work with the FCA to be exclusively about the MMR. The regulator had already identified other issues, including how firms were operating standard variable rates and whether the market was behaving competitively in areas such as exit fees.
At the beginning of the year, we were also anticipating continuing scrutiny of the measures lenders were taking to minimise payment problems for existing interest-only borrowers. On top of that, there were important challenges in responding to FCA requirements on data submission, both in assisting members and developing our own statistical coverage.
We have continued to cultivate relations with the FCA, including high level, forward-looking meetings, which we believe will be one component in maintaining a good understanding with the regulator, especially on thematic reviews. It is inevitable that a market that remains in the full glare of political scrutiny will continue to attract considerable regulatory attention.
Verdict: Now that we have two full months of data since the introduction of the MMR, it is clear that implementation has gone well and has caused little market disruption. But the longer term picture is not completely clear yet, and we remain concerned about the level of bureaucracy in areas such as product switches. The first significant opportunity to catalogue unintended consequences will be when the FCA undertakes its review of the MMR later this year, and we intend to play a major role in this.
Key challenges for the rest of this year will include work on the various thematic reviews of MMR implementation. The first phase of work on contacting interest-only customers went well, and we were able to present data showing good progress. FCA chief executive Martin Wheatley has commented positively on the interest-only exercise and the way in which the industry has co-operated fully.
The European mortgage credit directive
When the year began, many in the industry were expecting that implementation of the directive would not require many changes to UK regulatory rules. It is almost inevitable, however, that any directive ends up requiring more change than anticipated. Our goal, however, has been to minimise the changes required, and persuade the Treasury and FCA to adopt a similar approach.
Verdict: The changes that are proposed to implement the directive may yet prove to be substantial. That is likely to mean a significant workload for us, but this will become clearer later in the year when the authorities start to issue their own proposals. We have already begun the groundwork to try to influence these.
Retirement issues
We identified this as a key area for lenders at the end of last year, given the combination of new rules on lending into retirement, questions about the position of interest-only borrowers at retirement, and increasing concerns more widely about an ageing population and whether it will have adequate financial resources to support itself in old age. This is likely to result in closer work with firms in the equity release market, although most of the major suppliers are now CML members.
Verdict: Work in this area will extend into the long term, and has been given further impetus by the chancellor’s Budget announcement. We also expect the FCA to take a greater interest in this area, which links to concerns about the position of individual interest-only borrowers at the end of their mortgage term.
Arrears and forbearance
When in December 2013 we published our forecasts for the coming year, we predicted that the number of borrowers in arrears would decline to 150,000 by the end of 2014, and that the number of homes taken into possession over the next 12 months would fall slightly to 28,000.
Those forecasts were made against a backdrop of strengthening economic recovery, but continuing uncertainty about when interest rates would rise. Despite our expectation that mortgage arrears and possessions would continue to decline modestly, we anticipated the need to prioritise work on arrears-handing. We also set out to do more to understand the pressures on borrowers in the event of higher mortgage costs.
Verdict: Earlier this summer, we revised downwards our forecasts for mortgage arrears and possessions. These attest to the continuing commitment of borrowers, lenders and money advisers to address individual payment problems as they arise. The FCA’s thematic review of arrears landed well for industry, but we anticipate that our work with the Money Advice Service will assume a higher profile as we prepare for an imminent increase in the Bank of England’s base rate – the first in more than seven years.
Conclusion
The mid-year review of our policy themes reinforces the breadth of issues currently affecting the mortgage industry, and where we are continuing to work on behalf of members. As well as highlighting some significant industry achievements – most notably, perhaps, successful implementation of the MMR – the review highlights progress against a number of key priorities. There have been no real shocks or nasty surprises so far, but issues continue to evolve and change. Some, like off-site construction and shared ownership, have assumed greater importance – and are already on our radar.
There are many other policy themes on which we continue to work, and which may also become more significant in the months ahead. Some, for example, are driven by evolving regional priorities. Whatever the outcome of next month’s Scottish referendum, a debate will continue about devolved powers and responsibilities – and not just in Scotland. It will extend to the rest of the UK, as well. It will also have repercussions for lenders, as will developments in different parts of England, including London.
Meanwhile, we continue the longest build-up to a general election in the UK’s history. It will be a campaign in which housing, and its funding, will be key issues. The summer holiday period is coming to an end – and it isn’t going to be a quiet autumn!
