UK Mortgages 2010: Mortgage Funding

Introduction

Before the credit crunch, the wholesale markets were an increasingly important source of funding for many mortgage providers. As a result of the collapse of these markets, mortgage supply was severely curtailed. The government intervened to underpin the market, but with plans to phase out this support over the next few years, the outlook for a significant recovery in lending looks uncertain.

Scope

*Describes the scale of the collapse in wholesale funding, and the government response to the crisis.

*Analyzes the impact of reduced funding on mortgage availability, as well as the consequences for different types of provider.

*Discusses how lenders have responded to the crisis, and also their ability to increase mortgage funding over the next few years.

Highlights

The collapse in wholesale funding had a devastating impact upon the UK mortgage market. The number of available products fell by nearly 90% peak-to-trough, with non-mainstream sectors being particularly hard-hit. Lending and credit scoring criteria were also tightened. These factors contributed to a 60% fall in gross lending between 2007 and 2009.

Banks have emerged from the crisis in a stronger position than building societies, despite their greater reliance on wholesale funding. Banks that are participating in the government support schemes have benefited from borrowing on advantageous terms, and building societies are struggling to cope with the increased competition for retail deposits.

The government was forced to adopt measures to support the mortgage market in the wake of the funding shortfall, worth over £300 billion. However, the planned withdrawal of this support over the next few years raises questions as to how the funding gap can be met, particularly as retail deposits on their own are unlikely to prove sufficient.

Reasons to Purchase

*Understand the size and scope of the impact of the funding crisis on the availability of UK mortgages.

*Identify which types of lender have emerged in a strong position from the crisis, and which are finding conditions more challenging.

*Assess possible remedies for the funding shortfall, and the prospects for a recovery in mortgage funding.


Report Highlights
The collapse in wholesale funding had a devastating impact upon the UK mortgage market. The number of available products fell by nearly 90% peak-to-trough, with non-mainstream sectors being particularly hard-hit. Lending and credit scoring crit
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
UK mortgage funding has been severely affected by developments over the last two years 2
The credit crunch removed a vital source of funding for mortgages in the UK 2
The introduction of new financial instruments at the start of the century created a boom in lending 2
The growth in retail deposits did not match the growth in lending 2
New RMBS issues dried up in late 2007 and have yet to recover 2
The government created a number of schemes to support the mortgage market 4
The Special Liquidity Scheme aimed to inject liquidity into the financial markets 4
The Credit Guarantee Scheme was also intended to increase stability within the banking system 4
The SLS virtually replaced the RMBS market in 2008 4
Reduced money-market funding directly led to a collapse in the supply of mortgages 5
Worsening wholesale market conditions led to a steep reduction in credit availability 5
Credit availability and the cost of funds deteriorated over six successive quarters 6
The total number of mortgage products on the market fell by nearly 90% peak-to-trough 8
Lending criteria became much stricter in the wake of reduced funding 8
Maximum LTVs and loan-to-income ratios were reduced 9
There was a severe decline in the number of high LTV products on the market 10
More stringent credit scoring criteria were introduced 10
Mortgages became more costly as spreads widened 11
Gross advances fell steeply between 2007 and 2009 13
Specialist lenders dependent on wholesale funding have almost entirely pulled out of the market 14
Credit-impaired and self-certification deals are now almost impossible to obtain 15
Buy-to-let lending has also undergone rapid contraction 16
Banks are increasingly competing with building societies for retail deposits 17
Lenders will have to maintain their reliance on retail deposits for the time being 17
Different types of lenders face different challenges in the coming years 17
Banks have emerged as the strongest participants in the mortgage market 17
The ability of building societies to lend is being constrained by a combination of factors 19
Specialist providers will be unable to lend in significant volumes for the foreseeable future 21
Lenders who were less exposed to high-risk markets have outperformed their competitors 22
HSBC has succeeded in using its relative strength to boost its mortgage lending 22
Santander has managed to attract large numbers of new savings customers 22
The outlook for funding instruments is slowly improving 22
RMBS have gradually re-emerged as a source of funding 22
Providers have increased their use of covered bonds 23
Retail deposits on their own will not be able to fill the funding gap 25
The shortfall between retail deposits and customer loans widened to significant levels during the boom 26
The planned withdrawal of government support could have serious consequences for mortgage funding 26
Extend government support 27
Refocus on private sources for funding 27
Shrink balance sheets 27
APPENDIX 28
Supplementary data 28
Definitions 42
Covered bonds 42
Residential mortgage-backed securities (RMBS) 42
LIBOR 43
Methodology 43
Further reading 44
Ask the analyst 44
Datamonitor consulting 44
Disclaimer 44
List of Tables
Table 1: Public RMBS issuance in the UK, 2005-09 (£bn) 28
Table 2: Public and retained RMBS issuance in the UK, 2007-09 ($bn) 29
Table 3: Net balance of lenders reporting increase in credit availability due to improvement in wholesale funding conditions (%) 29
Table 4: Net balance of lenders reporting increase in credit availability and improvement in cost/availability of funds (%) 30
Table 5: Total number of available mortgage products 31
Table 6: Net balance of lenders reporting increase in maximum LTVs and LTIs (%) 32
Table 7: Total number of available 90%-plus LTV mortgage products 33
Table 8: Net balance of lenders reporting increase in credit scoring criteria and loan approval rates (%) 34
Table 9: Net balance of lenders reporting increase in lending spreads (%) 34
Table 10: Rate on variable rate mortgages vs. Bank of England base rate and LIBOR (%) 35
Table 11: Index of gross lending by specialist lenders and MFIs (January 1994 = 100) 36
Table 12: Total number of available self-certification mortgage products 38
Table 13: Share of gross mortgage lending by type of lender 39
Table 14: Net change in building society retail deposits (£m) 39
Table 15: New issues of mortgage covered bonds in the UK (€m) 40
Table 16: UK retail deposits and monthly year-on-year rate of growth 41
Table 17: Median customer funding gap (loans less deposits) for UK banks as a percentage of loans 42
List of Figures
Figure 1: RMBS public issuance fell away sharply in late 2007, and remains at negligible levels 3
Figure 2: Retained RMBS issues have almost completely replaced public issues 5
Figure 3: Throughout 2008, lenders stated that wholesale conditions were driving reduced credit availability 6
Figure 4: Quarterly changes in mortgage credit availability 7
Figure 5: The number of available mortgage products fell steeply in late 2007 and 2008 8
Figure 6: There was a sharp fall in the maximum LTVs available in 2008 9
Figure 7: The number of available 90%-plus LTV mortgage products collapsed in early 2009 10
Figure 8: Lending criteria tightened and loan approval rates fell drastically during the credit crunch 11
Figure 9: Spreads on mortgages rose significantly from late 2007 through to mid-2009 12
Figure 10: Spreads on variable rate mortgages ballooned in 2009 13
Figure 11: Gross lending by specialist lenders collapsed in 2008 15
Figure 12: Self-certification mortgages have been completely unavailable since November 2009 16
Figure 13: Banks' share of gross lending has significant increased during the funding crisis 18
Figure 14: Building society retail deposits fell in 2009 for the first time since records began in 1955 20
Figure 15: New issues of mortgage covered bonds in UK grew threefold between 2007 and 2008 24
Figure 16: Growth in retail deposits has slowed down since the base rate fell to a record low 25
Figure 17: The funding gap between customer loans and deposits rose to 30% by 2007 26

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