Victoria Mortgages became the first UK victim of the credit crunch when it went into administration last Monday. But what repercussions are we likely to see across the market as a result?
No surprises
The collapse of Victoria did not come as a complete surprise. The lender had been struggling for a few months, although sources appeared hopeful that it would survive. Back in June, Victoria hiked rates across its entire range, from between 80 to 100 basis points, which met with a storm of protest from brokers and packagers.
Then, at the beginning of August, and about the same time that db mortgages, Infinity Mortgages and Unity Homeloans withdrew their adverse ranges, Victoria withdrew all its non-conforming products.
By mid-month, the lender was planning a return but said products would be re-launched with near-prime rates up 1.25 per cent and non-conforming products increased by 2.5 per cent.
A spokesperson said the global liquidity crunch had created a position, ‘where there is effectively no bid for UK non-conforming mortgage securitised paper’.
In early September, Victoria said it would be launching new products within weeks, but on 10 September Victoria confirmed it had gone into administration and informed the market that it will not be able to complete outstanding mortgage offers. Christine Laverty and Michael McLoughlin of KPMG were appointed as joint administrators.
Simon Read, business development director at Victoria, says it will be working with packagers to find suitable solutions for pipeline business, and blames the closure on ‘disruption in the capital markets’, which has led to the termination of its funding lines.
Warning bells
Victoria was started two years ago with the backing of Venturion Capital, a New York venture capital group. The London-based company has a book of more than 1,700 residential loans worth £300 million. The Financial Services Authority (FSA) says Victoria represents about 0.064 per cent of the mortgage lending market and that around 381 customers who have current mortgage offers may be affected.
Katie Tucker, technical specialist at John Charcol, says: “The collapse of Victoria Mortgages will ring warning bells for off-balance-sheet lenders; there is no escaping now that crisis is upon them and they will act to protect themselves.
“Victoria’s borrowers with outstanding mortgage offers will have to find another lender. Borrowers that were already with the lender will, of course, have been securitised elsewhere anyway.”
Challenging times
Without a doubt, brokers are facing challenging times at the moment. Not only do they have to get to grips with rising interest rates and the roll-out of Home Information Packs, they also have to deal with the fallout from the US non-conforming crisis, which has led to mortgage products being withdrawn at short notice and, now, the UK’s first lender casualty.
But within days of it being announced that Victoria had been put into administration, several lenders stepped up to offer their help to packagers, brokers and customers affected.
CHL Mortgages and The Mortgage Business both launched dedicated hotlines to assist intermediaries and packagers affected by the decision and London Scottish Mortgages said it would support packagers with outstanding Victoria Mortgages cases.
Jeff Knight, spokesperson for GMAC-RFC, said that the FSA contacted the lender over the weekend preceding Victoria’s announcement to discuss the situation.
He says: “I can confirm that GMAC-RFC is happy to help with a number of borrowers who have purchase transactions proceeding, that otherwise would have been left unable to complete on their new homes. We are working with the FSA and the administrators to ensure these completions take place over the next few days as planned.”
However Kensington Mortgages director of marketing, Ian Giles, says it is down to the broker community to provide advice, not for Kensington to make a direct approach to Victoria, its administrators or its customers. “As brokers help their clients who were originally placed with Victoria, then if, in the broker’s view, a Kensington product suits the client’s requirements, we will be selected to help such a customer,” he says.
A negative effect
According to GE Money Home Lending (GEMHL), almost a quarter of all UK brokers claim the uncertainty caused as a result of the recent turmoil in international markets has negatively affected their business.
The lender’s broker research found that a similar number admit to being nervous about its potential effects. 63 per cent of brokers claimed to have faith in the non-conforming market but one in seven claim recent events will change the way they operate.
Three-quarters of these respondents claim they would be more discerning about which lenders they do business with – indicating that experience, infrastructure and reliability are key criteria for them. Only 1 per cent of the total sample claimed they would no longer deal with non-conforming lenders.
Colin Shave, chief executive officer of GEMHL, says that as a balance sheet lender, and with the benefit of GEMHL’s AAA credit rating, while not immune from the current turbulence in the marketplace, the lender is well-placed to weather the storm and remain committed to the sector.
He says: “Our research shows that many brokers are clearly nervous about the potential impact recent events are having on some lenders and this is creating uncertainty. At this time it is crucial that experienced providers, with financial strength and pedigree, reassure their partners of their long-term commitment to the non-conforming market, while ensuring that any changes to products, criteria or pricing are communicated in a timely, decisive and transparent fashion.”
Shave’s view is backed by Toby Nelson, communications manager at Platform, who says the collapse of Victoria reflects the air of uncertainty within the marketplace. “Borrowers will naturally be wary of lenders they haven’t heard of and brokers will be careful to recommend those that will support the client in the long term. They will be looking for consistency and those that make solid partners.”
Hard times
There is no doubt that times are about to get very hard for lenders who sell their own books on in order to fund their next lot of lending. Suddenly there is no market for these packages, which means that the lenders are holding onto these mortgages, the warehousing of which is costing them money, as additionally, the asset continues to drop in value. They will have to sell them cheap to clear their warehouses, which will erode profits.
“As the lenders’ income is squeezed, they will be forced to put their new rates up, partly to price themselves out of the market temporarily, but also so that any business they do get in will be at a much higher margin so more attractive when it comes to sell it on,” explains Tucker. “Lenders have also tightened criteria. A typical example is Kensington, which has reduced its maximum loan-to-value ratios – for example, its ‘HighOr’ range previously went to a maximum of 85 per cent, and has now been reduced to 75 per cent. An additional danger will be that these lenders could find themselves over-committed already and unable to complete on the mortgages already offered.”
Criteria tightening will massively reduce choice for borrowers. Where an 85 per cent remortgage may previously been met with several choices, some borrowers will now have none, leading to a rise in repossessions.
A distinct advantage
The ‘balance sheet’ lenders alternatively – those who do not sell on or securitise their portfolios – have a distinct advantage. While these lenders are not as lenient as the securitising lenders, they too can put up their rates if only to stop mortgage applications coming in at such a flood that it ruins service levels.
Tucker says: “This strategy will also allow them to improve their client quality by tightening criteria and in so doing, reduce the average risk of their portfolio. They can easily profit by moving margins to match market forces. For those balance sheet lenders that are plcs, however, it is important that they remain mindful of how their shareholders may react to an increased non-conforming book.”
It seems almost inevitable that rates on mainstream mortgages will also increase. Short-term money is in great demand and last week’s three-month LIBOR stood at 6.89 per cent – a massive 1.14 higher than the Base Rate. This means that even mainstream lenders that are lending at base, but borrowing at LIBOR, are suffering profit erosion. If this continues, margins will have to be squeezed and rates will have to rise across the board.
“Borrowers remortgaging now should take advantage of good discounts, because over the next nine months, obtaining funds is becoming progressively more difficult for lenders, which will result in them squeezing these discount margins,” warns Tucker.
A timely reminder
Whether other non-conforming lenders will go the same way as Victoria Mortgages is up for discussion. As it was a relatively small player, its collapse does not necessarily mean that others will follow suit. But it does serve as a timely reminder of how difficult the situation is at the moment.
“Any other recent market entrants with similar business models and backers must be considered to be at risk now,” says Giles. “Some lenders have only been able to enter this market by taking risks that some might deem irresponsible or pricing at such low levels that they cannot make a profit from their lending. Those lenders are even more at risk in the current environment.”
Melanie Bien, associate director of Savills Private Finance, says she would not expect other sub-lenders to go the same way as Victoria. “We don’t know how long these problems will continue nor how far some lenders are exposed, but it is extreme to go to the wall. Names such as GMAC-RFC and Kensington are unlikely to go bust but that doesn’t mean they won’t feel the pain for some time to come.”
Packager effect
Packagers are one key group of the intermediary market which have felt the impact of the turmoil in the non-conforming market. A number of product withdrawals in a short space of time have put a great deal of pressure on service levels. Applications submitted can sometimes be rejected as criteria changes come into effect; this means stressful times for packagers in this volatile environment.
Roger Morris, managing director of em-, says packagers that do business with Victoria will have been affected by the collapse. “We had mortgage offers outstanding with it that were unable to complete,” he says. “Some people had exchanged contracts but we had the option of GMAC-RFC which stepped in to honour the offers and clients were able to complete their purchases.”
Where clients are yet to exchange contracts, packagers have to re-broke the deal with another lender – a process made more difficult with constant adjustments to criteria in the current climate.
“It only affects about 1 per cent of our cases,” says Morris. “But some packagers who put business with Unity and Infinity which collapsed before will find it affects their income quite strongly.”
John Smith, sales and marketing director at GHL Group, says that having a lender or big aggregator of mortgage business going into administration is never good news for the industry. “Therefore, the recent announcement of Victoria closing its doors is disappointing and has meant the packager community is having to work extremely hard to replace partially processed cases and pulled offers. Never has the broker been so pleased to select a packager to deal with their clients’ application,” he says.
Smith points out that some of the replaced cases have had to go onto a higher rate and some have not been able to be replaced at all due to criteria, but he says that in the main, professional packagers have been doing a sterling job in providing a positive solution.
He says: “As the global market turmoil continues, business levels will undoubtedly be affected and packagers will need to apply caution to ensure survival. However, the packager market is robust and has had to deal with many challenges over recent years.”
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