Mortgage lending continues to slump

When the month of March comes around the mortgage and housing industry usually see a sharp rise in activity, with many consumers embarking upon their house hunting expeditions and applying for mortgages in order to purchase the home of their choice.

However, this year has been quite different according to industry officials, with the global credit squeeze having a severe impact on activity in these sectors, and figures showing a 17% year on year drop in mortgage lending levels.

According to figures recently released by the Council of Mortgage Lenders, figures for this March have been very disappointing.

Gross mortgage lending figures for this March stood at £26.3 billion, and this was more than five billion pounds less than the same month last year. Although mortgage lending in March was around 5% higher than in February of this year, industry officials stated that the figure usually rose by around 20% in March compared to February, so the rise was just 25% of the rise seen in previous years.

With consumer confidence and affordability at rock bottom levels, many would-be buyers waiting for house prices to fall, many homeowners worried about selling due to lower house prices, and lenders exercising far more stringent lending policies, the mortgage and housing sectors are facing extremely gloomy times.

With banks continuing to struggle in order to secure funding for their mortgage lending operations industry experts are predicting that the situation is set to get worse and worse over the course of this year, despite intervention from the Bank of England to try and get the wheels of the mortgage industry back in motion.

Michael Coogan from the Council of Mortgage Lenders recently stated: ‘Lending on completed transactions is currently running at levels considerably lower than a year ago. However, the picture for mortgage approvals for new business and prospective lending levels in the next few months is worsening. We await the eagerly anticipated announcement of further action by the Bank of England to respond to these rapidly worsening market conditions.’

He added: ‘Early action is needed if we are to be able to maintain a market in which UK borrowers continue to be able to access mortgage funds at reasonable prices. As mortgage costs increase, it remains important for any borrower with potential financial difficulties to speak to their lender as soon as possible, and preferably before they have missed a payment.’

One leading economist also commented on the bleak situation, stating: ‘The low level of mortgage activity is not only a consequence of slowing demand for houses due to the elevated affordability pressures facing potential house buyers, but also increasingly due to very tight credit conditions leading to markedly fewer and more expensive mortgages being available. Furthermore, potential house buyers are now having to provide higher deposit levels, which is a particularly major problem for first-time buyers.’

He went on to state: ‘The CML data therefore highlight the need for concerted, sustained action to try and get banks to lend to each other, so that more liquidity is available to fund mortgage lending and market interest rates come down. The government and the Bank of England is expected to announce a plan within the next week or so under which banks will be able to temporarily swap mortgage-backed securities for government bonds and then use these bonds as collateral for loans from other banks. This should help matters, but it is very unlikely to be the end of the problem.’

As if the situation wasn’t already bleak enough, many industry officials are also predicting that a large proportion of existing homeowners could soon find themselves in negative equity if the house price slump goes the way that many have predicted.

Around 10% of homeowners face falling into negative equity over the next two years, which equates to around 1.2 million households.

One economist stated: ‘There have been concerns about overextension in the mortgage market after many years of rapid growth. These data give a very strong indication of the weak points weekend the UK. The highest loanto-value areas are likely to be those most vulnerable to house price falls, as they will see negative equity emerge more rapidly. Negative equity was a major problem a decade ago, as it prevented many families from moving at a time when the market was already being hammered by high interest rates.’

He added: ‘While we do not expect such a long and deep slump as in the early 1990s, the outlook is for two years of falling prices along with a continued rise in repossessions.’ Another stated: ‘If house prices fall 15% then we estimate that £164bn of negative equity will be created, covering around 10% of all UK mortgages.’