The full speech is as follows:
I have fifteen minutes in which to describe the events in the most momentous year ever in the UK financial services sector. The housing and mortgage markets have been daily news, and centre stage in politicians’ minds and actions.
Banks and building societies have been open for business for much of the year, but the shocks following Lehman’s failure undermined financial stability, created financial shocks globally, and have led to massive political interventions in many national markets, supported by coordinated central bank actions to reduce interest rates.
It is not a surprise that, only a few weeks later, things remain abnormal and the markets for small businesses and home owners are dysfunctional.
With this broad canvas, but only fourteen minutes left, I have decided to address three questions only.
First, what has been the effect of mortgage rationing – demand for loans exceeding supply - so far?
Second, will we return next year to 2007 levels of lending as the government expects?
Third, what further actions do the government, Bank of England and Financial Services Authority need to take to coordinate an effective plan to help minimise the impact of the global recession in the UK economy?
First, what has been the effect of mortgage rationing?
In fact, the lending numbers show an interesting, and mixed, picture. In gross lending terms, we have had significant activity at an estimated £258 billion this year, admittedly substantially down from the 2007 level of £363 billion. By comparison, in 1997 when Labour came to power the equivalent figure was only £77 billion.
Most commentators know that we forecast net lending at £40 billion this year, down from £108 billion in 2007. How does this compare with the past? You might be interested to know that in 1997, net lending was around £24 billion. At the end of the last recession, net lending reached a low of £15 billion in 1995. Sir James Crosby has suggested that the net lending figure might actually be negative next year.
Low risk and low loan to value customers remortgaging have found relatively strong competition for their business this year. But, conversely, first time buyers and home movers have found mortgage availability a severe constraint.
Compared to the pre-credit crunch period, there is much less mortgage money available now. You are well aware that the capital markets which support securitisation and covered bond issuance remain closed in the UK, LIBOR remains stubbornly high, and there is fierce competition for a limited pot of retail savings.
It is not simply the sources of funds drying up which have created mortgage rationing. It is also the substantial reduction in the number of active mortgage lenders in the market compared to 2007. Wholesale funded lenders have been closed to new business.
The strategy of most building societies – the sector which has existed for over one hundred and fifty years to provide home ownership opportunities for their members – has been to tread water.
I would anticipate that a number of societies will not grow their mortgage books this year, and a few may even suffer a financial loss due to the exceptional circumstances in 2007 (just like some other lenders).
With strong competition for savings, and the high liquidity expectations of the regulator, societies have not been able to grow their mortgage market share in the way that I had anticipated when the credit crunch first hit in autumn 2007. As a sector they have less reliance on wholesale funding, so the impact of the credit crunch has been comparatively less because of their prudent business model.
Of course, mortgage funds available for home movers has been substantially impacted by Northern Rock shrinking its business, as it is required to do under the state aid plan agreed by the European Commission. While tax payers may be assured by the fact that Northern Rock is ahead of its plan, this has had a systemic impact on the amount of money available to help activity in the wider housing market – a significant unintended consequence.
Then we come to the experience of the other large banks.
No-one could have predicted twelve months ago quite how dramatic the impact of the credit crunch, the US sub-prime market, the funding constraints in the UK, de-leveraging and recapitalisation would collectively have on the major household names.
In fact, the largest banks and building societies have been the only active, consistent lenders in the market throughout the year. We have seen them play leapfrog on regular occasions in pricing and product criteria because demand has consistently exceeded supply, particularly in the first half of 2008.
Now, my estimate is that demand is much closer to supply, and at much lower levels of activity. This is because of the external impacts of mortgage rationing which we have seen - house builders not able to build, estate agents reporting record low numbers of sales, and substantial numbers of mortgage intermediaries exiting the market. Consumer sentiment has been increasingly affected by house price falls, and growing fear of unemployment.
First time buyers have been virtually squeezed out of the market because of the new deposit requirements. Even the Bank of Mum and Dad can’t afford the higher deposits as lenders’ tighter credit requirements have accelerated faster than falling house prices.
So, because there are fewer active lenders, with access to less money, we have in effect returned to mortgage rationing.
As we enter a new recession, what should be a reasonable expectation of new lending in the next few years?
Can this downward trend in the last 12 months be reversed so that we reach 2007 levels of lending next year as the government has insisted?
The simple answer is …. No.
While there is pent-up demand in a number of areas of the market, consumer borrowing will simply not return to the levels seen in 2007, even if funds increased and a wide variety of lenders were to become active in the market again.
In fact, unless government takes further targeted action to help market participants, we will see a worsening of the picture next year compared to this. I would therefore not disagree today with Sir James Crosby’s analysis or prognosis in his report.
However, the CML is not yet in a position to confirm its 2009 lending forecasts, as we continue to review the impact of the Pre-Budget report on future prospects. A good outcome next year in my view would be if we had lending at levels seen in 2008, but bearing in mind we will be in a recession, and reflecting on the figures I mentioned from the 1990s, this would be a real challenge.
So what does the government, Bank of England and Financial Services Authority need to do?
First, as we have said throughout the credit crunch, they need to take coordinated action not piecemeal, self interested decisions.
Second, wholesale funded lenders would be prepared to enter the market again, even if only modestly initially, if they had the right market environment. In autumn 2007, we first put forward the proposal which Sir James Crosby has recommended in his recent report to encourage new covered bonds and securitisations, backed by a guarantee, to encourage investor funds into the market.
We have also consistently pointed out that the deliberate exclusion of wholesale funded lenders from the special liquidity scheme has cut off a number of organisations who might otherwise have been helping to provide new mortgage finance now.
The Chancellor’s pre-Budget statement that there would be a report back on the Crosby recommendations by the Budget 2009 is simply not good enough - another missed opportunity.
But, surely, you might ask, retail savings institutions will lend more next year? Once again, the answer is ….No.
They are faced by a number of pressures, some of which I have already mentioned.
Deposit takers have been deliberately hit by the structuring of the bailout of Bradford & Bingley and the Icelandic banks, with London Scottish Bank to be added to the list. The government was keen to avoid tax payers having to pay the costs of the bailouts, but an unintended consequence was that they have financially constrained a large number of smaller deposit takers.
Having surveyed some of them recently, the annual financial services compensation scheme costs which they face equates in some cases to 20% to 30% of their annual profits.
It is simply a nonsense that small savings institutions following safe business models are financially hit by the failure of bigger organisations with riskier businesses.
My third suggestion?
The government either needs to reduce the interest rate payable on the loan in respect of the bailout to reduce the per firm cost, or preferably reverse its decision so that the cost is borne by tax payers generally rather than deposit takers only.
There is a plan to consult next year on deposit protection rules to see whether future contributions should be subject to an assessment of risk. This consultation is entirely sensible, but unless it could be retrospective in effect it will not help the real funding issue today.
The availability of funds for new housing market activity is still being limited by some organisations shrinking their mortgage books, and this problem is likely to be accentuated now that Bradford & Bingley has been nationalised.
My fourth suggestion - the government has to revisit the business plans for nationalised banks with the European Commission to take a more pragmatic effect on “state aid” as the unintended consequence today is that other housing market activity is substantially dampened by the levels of remortgaging.
Fifth, in a week of another MPC meeting, the government’s call for base rate reductions to be passed on to standard variable rate borrowers has been both short-sighted and counterproductive – they should recognise the unintended consequences of their comments.
Although a small percentage of borrowers - around 10% - may have a short-term financial benefit, this disregards the larger number of savers on fixed incomes dependent on their investment returns – the elderly and charities being two major examples of disadvantaged groups when rates fall.
Moreover, as base rates fall and if savings rates follow, savers could be less inclined to keep their money invested which would reduce, substantially, the pot of available funds to re-lend out to mortgage customers next year. This cannot really be what the government wants, but their actions encourage this outcome.
Should we expect the recapitalised banks to bridge the funding gap? After all, we taxpayers have bailed them out!
As the government is well aware, the billions of new capital, including £37 billion from the government, has been required by the tripartite authorities to protect institutions against potential future losses, not to fund future lending.
This re-capitalisation was an entirely sensible and innovative approach but, when added to the high cost to firms of accessing Treasury loans at 12%, and the costs of using the special liquidity scheme, it is not surprising that banks focus on re-building the strength of their businesses rather than taking on additional risks by new lending.
So, a further suggestion is the government should review the balance of its re-capitalisation measures, and take a more considered view about how to help create the environment in which the large banks could transact next year for the benefit of small businesses and home buyers alike.
Finally, and obviously, concerns about growing credit risk will be an increasingly important factor in commercial decisions about new lending plans. We do, after all, have an environment with house price falls and increasing losses from arrears and possessions.
Therefore, I will conclude with two further suggestions which are designed to address those particular risks.
The government has made an important decision to bring income support for mortgage interest forward to payment by 13 weeks from 39 weeks, with effect from next January. There was a modest improvement in the PBR when the scheme was extended to mortgages up to £200,000.
However, its failure to provide state support when one borrower’s income is reduced, rather than the household as a whole, means that the vast majority of people who will fall into arrears as a result of unemployment will not qualify for income support.
The government needs to address ISMI’s weaknesses as a matter of urgency. This is not new.
Some of you may recall that we first highlighted the holes in the safety net for borrowers in financial difficulties in 1999, when we started our sustainable home ownership initiative.
Finally, mortgage rescue is key. We must find a way to avoid cases going through the court process, with forced sales and rapid house price falls affecting repossessed properties. I welcome the industry’s support for a moratorium to give borrowers time to negotiate a suitable long term solution to short term difficulties.
However, in addition, after the arrears management process, I believe that a backstop scheme which enables the customer and lender to agree to sell and lease back a property before court action has considerable merits. It would resolve the mortgage arrears issue, provide stability and certainty for the consumer and support local communities, as well as underpinning property prices. However, it cannot be done purely as a private sector solution – it needs government support.
The current government plan to rescue 6,000 households at the risk of homelessness in the next two years is simply not ambitious enough to address the scale of the problem.
So where does this leave the CML? At the heart of all of these debates.
Like other housing and mortgage market bodies, we face a reduction in membership at a time when our thought leadership, and the need for a whole of market representative voice, has never been greater.
Today, hopefully giving a lead to market participants as a whole, we demonstrate our confidence for the future in launching our new logo and commercial activities programme.
We remain in almost daily contact with officials in government departments, and members, to identify how to address the blockages in the dysfunctional market that exists today.
If the UK economy fails to meet these challenges in a tough recessionary environment, then we will all end up worse off.
That must not happen, but it requires effective coordination by the tripartite authorities and the industry in a way that has never been seen before.
Rest assured we will play our full part to achieve the right outcomes for consumers, lenders, and the economy more widely.
Thank you.
