Self-build mortgage market will more than double in size by 2015

Research by Datamonitor indicates that mortgage advances for self-build properties will rise from less than £800m in 2011 to £1.9bn by 2015. Growth will be fuelled by growing consumer awareness of the self-build option, coupled with government measures to help those wanting to pursue this route to home ownership.

LONDON – Tuesday, 13^th December 2011 - The UK mortgage market remains badly affected by inability of providers to significantly expand lending, together with reluctance of consumers to extend their borrowing in such uncertain times. Datamonitor expects gross annual mortgage lending across the whole market to fall from an expected £138.5bn in 2011 to just £127.0bn in 2012, before rising to £182bn in 2015. This represents an increase of just 31% on the 2011 amount.

Over the same period, gross advances for self-build mortgages are expected to rise from £790m in 2011 to £1.9bn in 2015, an impressive rise of 141%.

“This growth will be driven by a number of factors,” explains Daoud Fakhri, Analyst at Datamonitor.  “Increasing numbers of consumers are become aware of the self-build option, through the influence of TV programs like Grand Designs, the desire for more individuality and self-expression, and the perceived low quality and poor design of many new build properties.”

“Perhaps even more significant than this, the government’s recently published Housing Strategy report has outlined a number of measures to facilitate the self-build path towards home ownership,” continues Daoud.

Among the report’s recommendations are moves to encourage local authorities to establish demand for self-build housing in their jurisdictions and take steps to satisfy this demand. The report also calls for the government to increase the amount of land available for self-build plots through its accelerated public land disposals programme, the creation of a one-stop shop for the provision of advice and information to self-builders, and for the appointment of a Custom Homes champion to raise awareness of self-building and promote its benefits.

The UK lags behind many other countries in terms of self-build properties. It is estimated that just one in 10 newly-built properties each year are constructed by their owners, compared to over 80% in Austria and over 60% in France, Germany, Italy and many other markets. However, a recent survey by the Building Societies Association revealed that 53% of consumers would consider building their own home if it was easier for them to do so.

“If the government’s reforms are successful in freeing up the market, the UK could be on the verge of a significant cultural shift with respect to house building, one which could create new opportunities for smaller and specialist lenders seeking to differentiate themselves from mainstream mortgage providers,” says Daoud.

For further information on this topic, please read Datamonitor’s forthcoming publication UK Mortgage Market Map 2011 (December 2011, CM00128-013).

-ENDS-

Daoud Fakhri is available for comment.  For further information or to arrange an interview with Daoud, please contact Kirstin Stocker at kirstin.stocker@informa.com or on 07716756453.

1.3 million Australians are experiencing mortgage stress

Despite the Reserve Bank lowering interest rates to levels not seen since the 1960s, a significant proportion of home loan borrowers are currently experiencing varying degrees of mortgage stress. Although less than 5% of borrowers in the Datamonitor survey agreed or strongly agreed that they had fallen behind on their mortgage payments, 23% agreed or strongly agreed that they are experiencing mortgage stress, which corresponds to 1.3 million Australian home loan borrowers. Borrowers who had bought their first home during the last 12 months were especially vulnerable, with 30% agreeing or strongly agreeing that their household is experiencing mortgage stress. When asked how difficult paying back their mortgage over the next five years will be, 21% of Australian mortgagors replied that it will be quite difficult or very difficult.

Australian mortgagors have cut back on spending due to mortgage concerns

The most common reaction from pressured home loan borrowers has been to cut back on spending. In the survey, 39% of borrowers agreed or strongly agreed that they had cut back on spending on luxury items in order to be able to afford their mortgage. Moreover, 29% reported having to cut back on household spending. However, concerns over the economy are not isolated to home loan borrowers; 29% of all Australian consumers regard it as very likely or quite likely that they will have difficulty paying their bills over the next 12 months. With recent indications that Australia is technically in a recession, and with unemployment forecasted to increase in 2009, these consumer concerns act against measures aimed at stimulating the economy, as consumers have become more wary of spending.

Fears of recession risk becoming self-fulfilling

The Reserve Bank’s attempts to stimulate spending by lowering the cash rate may have become less effective: the major Australian banks have not passed rate cuts on to borrowers in full, and borrowers may be hesitant to spend the money freed up by lower rates. There are also some concerns that cautious consumers may hoard government stimuli payments. There is the risk that consumer concerns will result in a negative spiral, as lower consumer spending leads to lower business spending and higher unemployment, which in turn leads to an even more cautious consumer mindset. In the Datamonitor survey, 86% of consumers deemed it quite likely or very likely that Australian unemployment would rise over the next 12 months, leaving a bleak near-term outlook for the country’s economy.

]]> http://about.datamonitor.com/media/archives/2583/feed 0 http://about.datamonitor.com/media/archives/2521 http://about.datamonitor.com/media/archives/2521#comments Tue, 05 May 2009 08:58:12 +0000 sdellarosa@datamonitor.com http://about.datamonitor.com/media/?p=2521 Sydney. Lower interest rates and an increased first home owner grant have resulted in a surge of first home buyers in Australia’s property market. In a new survey* by independent market analyst Datamonitor, 6% of respondents said that they intend to buy their first home in the next 12 months. Four out of five of these prospective first time buyers said that the increased first home owner grant was quite or very important for their purchasing decision. “The combination of interest rate cuts and an increased first home owner grant has created a potent incentive for first home buyers to enter the property market at this time,” comments Petter Ingemarsson, senior analyst at Datamonitor. “However, average loan size has risen for first home buyers, and prospective home owners must be careful not to overextend themselves, given that interest rates will not stay this low indefinitely.”

First home buyers have rushed to enter the property market

First home buyers have taken on an increasingly important role in the Australian property market. In February 2009, first home buyers accounted for $4.1 billion in lending commitments, up from $2.2 billion six months previously. Of all owner occupier lending commitments, first time buyers accounted for 30% in February 2009, which is the highest proportion ever recorded. In August 2008, first time buyers accounted for only 19% of owner occupier lending commitments. This surge in first home buyer activity has been fuelled by a slowdown in investment property lending, lower interest rates, and a boosted first home owner grant. “This combination of factors has led to a rush of first home buyers, with several lenders unable to keep up with the increased number of loan applications,” Petter Ingemarsson said. “The big banks have benefited from the ‘flight to quality’ effect of the financial crisis, whereby consumers seek out the perceived safety of a major bank.”

The increased first home owner grant expires June 30

In October 2008, the $7,000 first home owner grant was doubled for established homes and tripled for newly constructed homes, as a temporary boost set to expire at the end of June 2009. Critics of this plan warned that it would drive up prices for first home owners while not addressing core issues of low housing supply and affordability. There are some tentative indications that these concerns were valid. Between October 2008 and February 2009, the average home loan size for first time buyers rose from $265,000 to $281,000. During the same timeframe, the average loan size for other owner occupiers fell from $254,000 to $243,000. Despite this, the increased first home owner grant continues to constitute a strong incentive for prospective home owners. In the Datamonitor survey, 6% of respondents said that they intend to buy their first home in the next 12 months, corresponding to over 900,000 Australians. Of these prospective home owners, 78% said that the increased first home owner grant was quite or very important for their purchasing decision. “We may have a frenzy of first time buyer activity in the upcoming coming two months as the augmented grant deadline approaches,” comments Petter Ingemarsson. “Although the government has rebuffed suggestions for an extension to the boosted first home owner grant, there is still a possibility they will reverse their position due to public demand.”

First home buyers should be especially careful at this time

There are several reasons why prospective first time home buyers should be especially careful in the current situation. The augmented first home owner grant may have supported property prices at an unsustainable level. In the Datamonitor survey, 58% of respondents deemed it quite or very likely that average Australian property prices would fall in the next 12 months. Moreover, interest rates are at their lowest point since the 1960s, and prospective buyers should be sure to budget for eventual rate rises. First time buyers are generally more highly leveraged than other borrowers, making them more vulnerable to adverse rate movements. Unemployment also poses a risk for first time buyers, as most industry observers predict unemployment to continue rising throughout 2009. “Prospective first home owners should carefully evaluate their individual situation before signing up for a mortgage, and not be overly affected by temporary grants,” cautions Petter Ingemarsson. “Stagnant property prices, combined with rising interest rates and growing unemployment, would constitute a nightmare scenario for this vulnerable group of borrowers.”

Sydney, Friday 27 March 2009. According to a new survey of Australian mortgage brokers* conducted by independent market analyst Datamonitor, the industry has been severely affected by the economic downturn. Brokers have become less optimistic about short term business expectations, and have diversified into other product areas. The average commission rates received by brokers have fallen significantly in the last 12 months, forcing some brokers to leave the industry. As mortgage customers flock to the large banks, many brokers fear that competition in the market will decline. Petter Ingemarsson, Financial Services Analyst at Datamonitor, comments “Mortgage brokers and non-bank lenders enjoyed a symbiotic relationship in Australia, and the downfall of non-bank lenders has hit the mortgage broker industry hard.”

Mortgage brokers are going through a turbulent period as the effects of the global credit crunch hits home

The global credit crisis has adversely affected all participants in the mortgage industry. Total housing lending commitments fell by almost 15% last year, from A$264 billion in 2007 to A$225 billion in 2008. The financial crisis forced non-bank lenders to exit the market, which had serious effects on the mortgage broker industry. With the exit of non-bank lenders, the major banks achieved a stronger competitive position, which they can use to focus on the direct channel and to decrease commissions. In the Datamonitor Australian Mortgage Broker Survey, conducted in February 2009, almost three quarters of surveyed mortgage brokers agree that the absence of non-bank lenders lowers competition in the market.

Non-bank lenders account for a falling proportion of lending commitments

One of the most important paradigm shifts in the mortgage industry since the emergence of non-bank lenders in the 1990s has been their rapid departure from the Australian market over the last 18 months. In July 2007 non-bank lenders accounted for 21.2% of lending commitments to owner occupiers, a figure which had fallen to 6.8% by December 2008. Mortgage customers have instead turned to the perceived safety and security of the major banks. This development has hurt mortgage brokers, since non-bank lenders traditionally paid higher commission rates to brokers than the banks. Moreover, the major Australian banks have all moved to cut mortgage broker commissions.

The major banks started cutting commissions in mid-2008

As the effects of the global financial crisis became clearer, and as loan margins contracted, the major Australian banks moved to cut costs by reducing mortgage broker commissions in 2008. Westpac was the first of the major banks to reduce mortgage brokers’ commission levels, announcing drastic cuts to both upfront and trail commissions in April 2008. St.George, CBA and NAB followed suit in May 2008, introducing lower commissions for brokers unless specific performance targets were met, while ANZ revised its commission structure the following month.

Asked about their average upfront commission levels, 80% of surveyed brokers in the Datamonitor Australian Mortgage Broker Survey currently have a commission rate below 0.60%. In 2007 only 27% of surveyed brokers had commission levels in that range. Most brokers believe that commission levels will either stay the same in 2009 or fall even further.

Consolidation, diversification and specialization are set to continue

Consolidation, diversification and specialization have become the most important market forces as the mortgage broker industry focuses on surviving these difficult times.

• Consolidation is largely driven by cost considerations, as economies of scale make it more efficient for large lenders to deal with large mortgage broker companies. The largest mortgage broker groups each have annual loan settlement volumes of around A$20 billion.
• Diversification involves brokers exploring other financial products to sell, including insurance and financial planning. Products other than residential mortgages may offer higher commissions, higher market growth rates, or both.
• Specialization is the opposite strategy of diversification. Some brokers have maintained market share by focusing narrowly on a particular customer segment or product area, leveraging consumers’ need for customized service and advice.

Many industry observers expect the mortgage broker industry to make a strong comeback when market conditions improve. Moreover, federal regulation of mortgage brokers is being introduced by the government in 2009. The end result of these tumultuous changes could be a stronger and more transparent broker industry.

]]> http://about.datamonitor.com/media/archives/2179/feed 0 http://about.datamonitor.com/media/archives/1597 http://about.datamonitor.com/media/archives/1597#comments Wed, 28 Jan 2009 15:34:20 +0000 media@datamonitor.com http://about.datamonitor.com/media/?p=1597 London - Mortgage intermediaries are turning away from their standard business model and looking to diversify into new fields, according to independent market analyst Datamonitor*. Intermediaries are moving into advising-on or selling other products, particularly general insurance. Some are even looking into cross-selling electricity and gas to make up for the current shortfall in mortgage business. ‘Despite the government’s efforts to get banks lending again, lending levels remain low and so intermediaries need to find different avenues in order to survive the downturn in the hope that they’ll be in a stronger position when the upturn comes’ comments Rod Logan, financial services analyst at Datamonitor and author of the report.

Mortgage intermediaries are looking to increase cross-selling

As conditions in the mortgage market remain difficult due to the constriction in supply, mortgage intermediaries have sought to stem the fall in their regular income. Three-quarters of respondents in Datamonitor’s mortgage intermediary survey stated that they were maximising cross-selling and commission opportunities in order to compensate for lost income in other areas of their business. Some intermediaries told Datamonitor that they are speaking to existing customers more as well as looking to increase their advertising expenditure. Intermediaries are looking at cross-selling and commission opportunities in general insurance in particular as well as utilities and debt management. Affinity partnerships with existing insurers are an effective way into the market.

Diversification is not always straightforward

Nearly half of the UK population (47%)** does not hold any protection policies against loss of income, health issues or death which suggests plenty of scope for growth. However, negative publicity, tightened regulation and a perception that protection policies are expendable when budgets are tight suggests that mortgage intermediaries will have a tough time selling them over the coming months. Almost three-quarters of respondents stated that they were looking to diversify into other sectors by offering advice on areas such as investments and pensions. However, stringent regulation and qualification requirements make it costlier for intermediaries to offer these products compared to general insurance.

The mortgage intermediary market will recover

Despite the potential difficulties inherent in diversification, Datamonitor expects the mortgage market to recover in 2010. The complicated nature of mortgage products will ensure that the demand for the intermediary channel will remain strong with their share of the overall distribution of mortgages expected to grow compared to the direct channel.

With less funding available, lenders are repositioning their products and re-assessing their risk. As a result, products are being withdrawn and customers are increasingly being turned down. This has created a very challenging environment for intermediaries where their priority now is securing mortgages for customers rather than trying to negotiate better lending terms and proc fees. With limited supply and relatively strong demand, the market is seeing a shift in the balance of power from networks to lenders.

Intermediaries set to lose revenues

The credit crunch is forcing lenders to reconsider their intermediary channel distribution. Many are now very selective in terms of their distributors while others are prioritising branches. With significantly lower lending levels this year, intermediaries are set to lose considerable revenues. While many intermediaries should be able to weather the storm and deal with a fall in revenue, some are currently in a vulnerable situation, particularly those intermediaries who have high fixed costs. With many lenders rethinking their distribution strategy, intermediaries need to step up their services and further strengthen their relationship with their key lenders.

Intermediaries are concerned about lenders moving away from broker distribution

Datamonitor’s Mortgage Intermediary Survey** highlights that ‘lenders pulling way from broker distribution’ is the main concern for intermediaries at 53% of responses. However, in Datamonitor’s opinion, this shift is unlikely to have a major impact on indirect distribution and the intermediary channel will continue to remain the major channel of distribution in the UK mortgage market. The second major concern for the intermediaries surveyed was falling commissions, with 50% of participants stating they were concerned about this issue.

As lenders’ margins on mortgages have decreased due to fierce competition, the level of commission paid to brokers has come under threat. Moreover, the fact that funding costs have increased may lead to lenders reducing their proc fees, particularly given that the credit crunch has created a level playing field for lenders and intermediaries. Indeed, HBOS recently reviewed its proc fee levels, with Halifax reducing its fees by 0.03% and BM Solutions by 0.05%. With the biggest UK mortgage lender taking such an action, it is possible that other lenders will follow suit.

Datamonitor predicts that the intermediary market will lose share over 2008

Datamonitor estimates that 65% of total mortgage gross advances were generated via the intermediary channel in 2007. While the indirect channel will continue to account for the lion’s share of mortgage distribution, Datamonitor predicts that they will slightly lose share in 2008 to account for 63% of gross lending given that the liquidity crisis is dealing a big blow to niche sectors in which intermediaries are primarily responsible for distribution, such as sub-prime and self-certification.

Mortgage packages appeal to price conscious customers

Mortgage packages were first launched by Australian banks in the 1990s, in a bid to compete on price with emerging non-bank lenders. Initially, the so called ‘professional packages’ were only available to the top end of the retail banking market. A decade later, the awareness and availability of mortgage packages has exploded into a A$130 billion business, and most mortgagors are now eligible for package deals. Datamonitor estimates that 50% of all new mortgages now are part of a package deal.

From the customers’ perspective, mortgage packages offer three major benefits. First and foremost, packages offer mortgage rate discounts of up to 70 basis points off the standard variable rate. This is particularly important as many Australian mortgagors are feeling the strain with housing affordability at a record-low, says Datamonitor financial services analyst Petter Ingemarsson. “The second reason is that packages generally consolidate banking fees into a single annual package fee, which can entail fee savings for some customers.

“Finally, mortgage packages are a convenient way to manage banking needs, especially for customers with several loans,” he says.

Mortgage packages can improve customer acquisition, retention and cross-selling

The major Australian banks have embraced mortgage packages because of the versatility of the product. Packages can improve customer acquisition, retention and cross-selling.

Acquisition is mainly driven by the mortgage component of the package, with the mortgage rate discount being the main drawcard for attracting new customers. For retention, the transaction account component is the most important, as research shows how this inclusion makes the customer less likely to switch provider. Cross-selling opportunities are mainly provided by the credit card component of mortgage packages.

Apart from these advantages, mortgage packages also provide a convenient and discreet way for banks to alter pricing of new mortgages, Mr Ingemarsson says. “Banks can reduce the package discount without enduring the censure that raising the standard variable rate would involve.”

Current developments point to a bright future for packages

Several factors suggest that packages are set to retain their popularity. The current global credit crisis has driven many mortgagors back to the major banks, which are perceived as safe institutions. As major banks are the predominant providers of mortgage packages, this will lead to an even greater proportion of package deals in the market, Mr Ingemarsson says. “Moreover, smaller domestic banks and foreign banks are diversifying their product line, and as more institutions are capable of offering packages, their prevalence will continue.

“And since package deal customers who do switch providers are more likely to take out another package, mortgage packages are in a sense self-perpetuating,” he says.

Low housing affordability discourages prospective mortgagors

Rising house prices and interest rates have caused housing affordability in Australia to hit an all-time low. In the Datamonitor survey, 24% of mortgagors expect it will be ‘quite hard’ or ‘very hard’ for them to keep up repayments on their mortgage over the next five years. Only 18% of respondents say they expect to find it ‘quite easy’ or ‘very easy’. Moreover, 24% report experiencing financial stress about their mortgage situation.

Getting on the property ladder has also become harder. Of those that don’t have a mortgage, 55% expect to never purchase their own home. The main reason barring Australians from home ownership is being able to afford mortgage repayments, but high rental costs have also made it harder for many to raise a deposit.

A high proportion of mortgagors now have little or no deposit

As fewer Australians have been able to save substantial deposits, mortgage products requiring little or no deposit have flourished. Datamonitor found that 15% of mortgagors had no deposit for their main mortgage, and a further eight percent had a deposit lower than five percent. Only 34% reported having a deposit of 20% or more, Mr. Ingemarsson says. “Although this development has helped Australians onto the property ladder, low deposit products leave mortgagors more vulnerable should property prices fall. Refinancing a loan in this contingency may be difficult.

“This is especially concerning given many borrowers have acquired mortgages with the intention of refinancing as soon as possible,” he says.

Many borrowers expect to refinance their mortgage within a few years

When asked how long they expected to keep their current mortgage with the same provider, respondents in the Datamonitor survey fell into two groups: 48% expected to keep their current mortgage for ten years or more, while 22% only expected to keep their current mortgage for two years or less. This shows how a large proportion of Australian borrowers get mortgages with the intention of refinancing with a more advantageous mortgage whenever possible, Mr. Ingemarsson says. “However, this poses a risk, because if economic conditions deteriorate these borrowers may find themselves trapped in a mortgage they didn’t expect to keep long-term. A stagnant property market, combined with increasing interest rates, could thus lead to financial difficulties for this group,” he says.

The most highly-publicized troubles center on ‘sub-prime’ mortgages in the US, but a number of institutional practices and economic trends are exacerbating the problem there.

Over the last several years many mortgages in the US were originated with ‘no money down’, effectively giving borrowers a loan with no financial commitment beyond the monthly payments. At the same time interest rates rose 16 times since June 2003, making variable rate mortgages more expensive (around one-third of mortgage originations are variable). Furthermore, US savings rates turned negative in 2005, meaning that consumers have been spending more than their income since then, going deeper into debt with a dwindling ‘cushion’. As a result, a large number of homeowners have walked away from their mortgages. In fact, in Q2 2007 more than five percent of all US one-to-four-unit residential property mortgages outstanding were in delinquency. The data for sub-prime loans makes even worse reading, with nearly 15% of all sub-prime mortgages in the US in delinquency as of Q2 2007, versus 2.73% of prime mortgages.

The widespread securitization of loans is compounding the problem of delinquencies

But the residential mortgage market is only one side of the equation. Banks across the US and the world have packaged their mortgages together into mortgage-backed securities (MBS) and sold them into the secondary mortgage market. This market is enormous worldwide, and this is where the knock-on effect of America’s delinquencies will be most keenly felt because these MBS are on the balance sheets of the world’s financial institutions.

In Europe, the UK is the largest issuer of residential mortgage-backed securities (RMBS), originating almost half of Europe’s estimated €120 billion RMBS issued in 2005. This puts the UK market in a precarious position, because even if UK banks don’t hold US MBS, they probably do hold UK securitized loans.

The next two years will see a shift in the demand for wealth management services

During market volatility, clients want to understand the impact on their portfolios, now and in the future. Unfortunately, as of late September Fidelity International and Bank of America / US Trust were among the few wealth managers to formally communicate their market view to clients. This leaves most investors uncertain about their financial future during a time when their needs are changing. Several wealth managers are well-positioned to take advantage of these shifts in clients’ financial thinking.

As Central Banks cut rates to kick-start the economy, remortgaging will increase in importance. Wealthy individuals’ high credit ratings make them particularly attractive targets. First Republic, Wells Fargo, US Bank’s Private Client Group, Citi Private Bank and UBS Wealth Management already have remortgage programs in place. Clients will also be tempted to move into cash and ‘safe haven’ investments like capital protected notes. Merrill Lynch, Wells Fargo and UBS all have cash management facilities linked to their clients’ investment portfolios. And some clients will see the opportunities in a property downturn, giving HSBC Private Bank, Anglo Irish Bank Wealth Management and several UK IFAs like Hanson Wealth and Braemer Wealth Management the chance to use their property search and investment services to increase share of wallet and attract new clients.

Savings providers are well placed to take advantage of current market conditions

The volatility in the equity markets will undoubtedly propel more consumers to seek the security and predictability of fixed income instruments. Despite competition in the form of mutual funds and insurance products, Datamonitor predicts that in the world’s major economies, deposits will continue to dominate retail savings and investment portfolios.

In order to secure a greater proportion of customers’ savings, in the first instance, banks will derive quick wins by offering competitive rates and steering customers into optimization of their tax-efficient savings options. However, the Northern Rock crisis in the UK and global market uncertainty will demand an equal effort to reassure customers about these institutions’ stability and applicable guarantees on customers’ deposits. Beyond this, the greater challenge lies in pursuing innovative strategies that will see providers expanding their customer bases and, more importantly, retaining customers when market and investor confidence recover. Existing examples include direct marketing and ‘refer-a-friend’ promotions, such as those implemented by Wachovia in the US and Alliance & Leicester in the UK. Product development and marketing should focus on helping customers to improve their overall financial position. Offset accounts, such as those offered by C&G and First Direct and sweep accounts, particularly those linked to brokerage facilities, such as those available from Merrill Lynch, UBS and Wells Fargo can also help savings providers to make the most of current opportunities.

Life companies could benefit from market uncertainty, but only if they can reassure clients

Aside from deposits, life company investments and pensions may also see an inflow of funds, but only if the benefits of a long term strategy are effectively communicated. Life companies will benefit from the current uncertainty as clients move investments into more ‘certain’ and risk-averse areas. The traditional model that life companies rely on, that of long-term, low risk, low return investments can be used to attract clients that are looking for a safe haven.  However, what is crucial to life companies is that customers fully understand what is happening in the markets and do not become concerned if there are temporary fluctuations in their investments, says Datamonitor life and pensions analyst Annabel Gorringe.  ”Whether money has been placed in a pension or a life-based investment, clients must remember that these are designed to meet long-term financial goals and short-term fluctuations should not be the primary concern,” she says. 

The problem for life companies is the laissez faire attitude within the IFA community; their main point of contact with the customer.  Datamonitor’s November 2007 research identified that only 17% of IFAs are “very concerned” by the potential for recession in the next year, while 34% declared themselves “unconcerned”.  These findings come at a crucial point in time when customers need to be reassured and talked to to allay their fears.  It appears that this communication will not be initiated by the advisors, Miss Gorringe says.  “Some providers, including HBOS have been effective in their direct communications with clients, however, without a follow up dialogue with an advisor face-to-face, clients will remain nervous.

“Providers need to develop a joined-up strategy in association with the IFA community to ensure that clients are kept informed not only of the major market changes but how this will impact their portfolios directly,” she says.

Increasing defaults in the US sub-prime mortgage market and the ensuing global MBS market freeze have triggered a credit crunch, which now risks putting the US into recession and is already being felt in the UK through a slower economy and declining house prices.

While traditionally UK mortgage lenders have relied upon retail deposits for funding, raising funding through the wholesale markets has become increasingly popular in recent years. Indeed, this method of funding accounted for a median of 27.8% of all funding in December 2000 but grew to 47.8% in the first half of 2007. Securitization in particular has become much more common because of its benefits to lenders.

Northern Rock’s heavy dependence on the wholesale markets forced it to seek emergency funding from the Bank of England in September 2007, as the global MBS market froze. With the bank run and ensuing events, debate has been triggered on lenders’ funding models in the UK.

Specialists are now particularly exposed to liquidity shortages

Not all lenders are being impacted to the same degree by the liquidity shortage and securitization freeze – indeed, it is lenders in the specialist sectors (sub-prime, self-certification, and buy-to-let) who are being impacted more as these lenders tend to rely on wholesale markets and securitization to a greater extent. Because diversified banks fund around half or more of their mortgages through retail deposits, and building societies have to follow legislation that dictates wholesale funds to fund mortgage lending can total no more than 50% of its total balances, these lenders are at less risk. Indeed, a number of examples serve to show this trend in the specialist sector: GMAC-RFC is making redundancies, while there has been discussion that Paragon Mortgages could be forced to run its business down if no new funding appears by Q2 2008.

Yet funding by wholesale markets and securitization will continue being relied upon as it is a strong model

UK lenders’ funding models that rely upon wholesale funding and securitization in particular. Yet this type of funding will continue being relied upon as it is a strong model.

Funding by the wholesale markets has been in place for decades and has commonly not been an issue. Moreover, securitization has, up until recently, been a strong model for many years. Indeed, MBS have been used in the US for decades, and more recently, MBS have been expanding in Europe and other financial markets around the world. In fact, over the last decade – and specifically in the last five years – the UK mortgage market has developed into one of the most innovative in the world, with the ability to cater to all types of customers. Such a development has been largely due to the development in non-retail funding, particularly securitization.

There can be no turning back on funding models developed over the last decade in the UK. Many lenders would simply be unable to cope and the mortgage market would see a severe reversal in its development and sophistication. Indeed, the restoration in confidence in wholesale markets and securitization is necessary in maintaining the UK mortgage market that investors, lenders and consumers have become used to and benefited from. While the wholesale markets are currently more expensive and illiquid, and the market for MBS has come to a virtual stop, Datamonitor believes that eventually, lending based on wholesale funding and securitization will return. Once the markets understand and admit the extent of exposure to US sub-prime mortgage debt, it will then take some time for them to start investing once again in sound markets and securities.

However, before that can happen, all stakeholders involved in the financial markets and mortgage funding should look to put safeguards in place so that the unfortunate events that have transpired do not occur again. As Maya Imberg, Financial Services Analyst at Datamonitor states, “the Chancellor Alistair Darling’s recently announced plans for primary legislation to be introduced in May 2008, which would include giving the FSA greater powers to monitor banks’ liquidity as well as their capital requirements, can only be a good thing in order to look to avoid other possible funding crises in the future. With preventative measures being implemented, funding via the wholesale markets and securitization will be a safer and healthier option than before.”