London Waterloo station seems an apt location to meet Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA).
The station, fresh from losing its position as the capital’s gateway to mainland Europe’s railway network to London St Pancras, is currently in a state of limbo.
Having enjoyed a decade of breaking new ground in the UK, the station is now being forced to evaluate its future and how best to deploy its resources to achieve the most cost-effective outcome.
Much the same could be said of the UK lending sector. Having enjoyed a period of unbridled success, the brakes have been applied on the market and lenders up and down the country are having to look at their operations and decide how best to proceed.
“All the assessments for the first half of the year were for £360 billion of gross lending,” Williams says. “That was record lending as of any other year, but that set of circumstances changed fundamentally in the second half.”
High-profile casualties
No institution can epitomise this year of two halves better than Northern Rock. Having dominated the mortgage market in the first few months of the year, the lender has been the most high-profile casualty of the credit crunch.
As Williams and myself agree, Northern Rock has become synonymous with everything that has happened in the global financial markets.
However, Williams believes that while Northern Rock is the ultimate example of the issues facing the financial sector, there is a concern that it could overshadow the problems in the wider market.
“Northern Rock is a manifestation of the problem, but it isn’t the total problem. The danger is that the government and the Financial Services Authority (FSA) are obsessed with solving Northern Rock’s issues and are missing the point that underneath you have a market which is not functioning. The much more important angle is to restart the market. That would then help everybody, including Northern Rock.”
However, the credit crunch which has crippled the capital markets and suffocated lenders, like Northern Rock, who rely on wholesale funding, is set to continue for the foreseeable future. Everyone has their own theories about when the securitisation market will return to something resembling normality, but no one has the crystal ball that will tell them the right answer.
“I think the answer of when is completely unknown,” Williams acknowledges. “A lot of people were rather confidently talking about the market returning towards the end of this year – it hasn’t. Some people then rather confidently talked about securitisations coming back in the Spring. There is a question mark over whether they will. I suspect we’re going to face a UK residential mortgage-backed securities market only very slowly moving forward through next year or so.”
Avoiding the stigma
Therefore, it seems that lenders won’t be using the wholesale markets for a while yet. This does beg the question though of how will all the lenders in the market survive until then? With many relying on the money markets, how are they going to raise the capital to continue lending? Williams points to taking deposits, private book sales and raising cash through shareholders; examples we have already seen in the last few weeks.
“And, of course,” he adds, “Some are borrowing from the European Central Bank (ECB).”
Excuse me? Is that a widely known fact or did I miss something? When Northern Rock went to the Bank of England for funding, it was splashed all over the 10 O’ Clock News. Why didn’t these lenders go to the Bank of England and why have we not heard this before?
Williams supplies the answer. “Because the Bank doesn’t offer the same terms and doesn’t offer the same protection. It’s not known if you are borrowing from the ECB; it is if you are borrowing from the Bank of England.”
So the anonymity on offer under the lending terms of the ECB means that lenders who are in need of assistance can go there and prop themselves up, without being decried as the next Northern Rock.
As Williams explains: “The way the market is and the nervousness of the market, if you’re seen to be borrowing from the Bank, that is seen as a sign of weakness. The City then trades against you and that then further damages your position. With the ECB, that’s not the case.”
So if lenders are bypassing the Bank of England and going straight to the ECB, why didn’t Northern Rock do this? Wouldn’t that have helped protect it from the very public onslaught on its branches in the days after it drew on emergency funding?
Serious questions
For Williams, and IMLA members as a whole, the last few weeks have raised some serious questions. “There is an issue that the Bank, the FSA and the government have underperformed during this period. The Bank should be matching what the ECB does. The Bank should be more active than it is and, so indeed, so should the FSA, which has overall responsibility for stability of the financial system.”
Williams’ general tone points to major failings from the regulator as the market has been far from stable, with rumours rife and lenders struggling to maintain their position in the market. But surely, with the world capital markets faltering and factors outside the FSA’s control driving events, the regulator can only do so much? For Williams, the FSA is not completely blameless.
“The reality is that this has happened on the FSA’s watch. There will be many who will view Northern Rock as a failure of regulation and who take the view that the FSA did miss this. There would be a view, a strongly held view, that its consumer agenda, i.e. its focus on outcomes and what is happening with consumers, has dominated the FSA too much and it hasn’t given that attention to the market. I think there is a question now about whether there should be some rebalancing within the FSA about its agenda.”
Not above the law
However, the FSA has only finite resources and different people have different views on how they should be allocated. One allegation thrown at the FSA from brokers is that much of the regulatory attention is placed on intermediaries, and not enough on lenders. On this, Peter insists it’s purely a numbers issue, but lenders should not be above the law.
“As lenders, we don’t see ourselves above criticism. We expect, and indeed get, criticism from the FSA about practices. Some of the processes around validation of income, for example, on self-certification are under scrutiny. The FSA continues to stress that lenders have to be more active, have to have a clearer documented history of why particular decisions and recommendations are made. But I think as there are 11,000 broker firms, for the sake of argument, and there are 200 lenders, it’s not surprising in a sense that the FSA focuses on broker performance.”
Within this though, Peter is keen to stress the idea that lenders and intermediaries are a partnership and both are reliant on each other. He points to IMLA’s increasing work with the Association of Mortgage Intermediaries (AMI) as a key example of this.
“We have got some real momentum behind the work with AMI. The working group is rolling forward in the New Year, we’ll be doing a joint response on the Retail Distribution Review and we’re doing some work on a number of areas, such as provider/distributor relations and cascading. All of which are vital points of interaction between lenders and mortgage intermediaries.”
Weathering the storm
And this partnership will continue to be important into 2008 as the market attempts to sail through the current storm. Uncertainty will still be a huge factor in everything that is done, especially in the early months of next year. Williams insists that lenders will remain as committed to its intermediaries as possible and will try to help them every step of the way.
“It is very important for IMLA, working with mortgage intermediaries, to try and give the market confidence. It is still a very substantial market. There is an awful amount of opportunities for lenders and intermediaries within that. So clearly we are going to have to look at sharpening up product offerings and ranges, trying to improve the way lenders interact with mortgage intermediaries and make sure we work very effectively with brokers through this period.”
So the message seems to be clear – that if the mortgage market sticks together and everyone helps each other out, it’ll be okay.
“The market has been challenged and it has stood up pretty well,” insists Williams. After so many trials and tribulations over the past few weeks, it’s good to hear someone acknowledge the resilience the industry has shown in the face of the recent, and unprecedented conditions.
