30 May 2019
UK Mortgage Approvals Peak Sparking Mortgage Price War
British banks last month approved the greatest number of mortgages since February 2017, adding to signs that the housing market may be over the worst of its pre-Brexit slowdown, a survey showed on Tuesday.
Banks approved 42,989 mortgages in April, up from 40,564 in March and 11.5% higher than a year ago, marking the biggest annual increase since March 2016, according to seasonally-adjusted figures from industry body UK Finance. Net mortgage lending rose by 1.795 billion pounds last month, a smaller increase than March’s 2.440 billion pound rise which was the largest in 15 months.
Britain’s housing market slowed sharply in the run-up to the original March Brexit deadline but consumer spending has remained solid, driving economic growth just as businesses have cut investment spending due to Brexit uncertainty.
UK Finance said consumer lending increased 3.8% year-on-year in April, slowing a little from March’s growth rate of 4.1% which was the highest in nine months. Lending figures from the Bank of England, which cover a broader section of Britain’s finance industry, are due on Friday.
Bank of England Says It Is Watching Mortgage Prices War ‘Like A Hawk’
Regulators are watching a price war in mortgages “like a hawk” and may need to impose stricter minimum capital requirements on lenders, Bank of England Deputy Governor Sam Woods said last week.
The price war that has escalated over the past two years may be good news for consumers wanting to buy their first home, but it is less good for a bank or building society concentrated in mortgages, Woods told the Building Societies Association.
High loan-to-value ratios and higher loan-to-income mortgages can be well captured by the BoE’s capital requirements. “But we should be watching them like a hawk,” Woods said. Falling capital levels have been seen at lenders who use their own computer models to work out the riskiness of loans on their books and therefore how much capital to hold.
“The amount of capital being set aside to cover mortgages has been falling. Still, I think we should approach this trend with a very sceptical eye and need to consider whether there is a case to impose more floors in firms’ models, particularly given the current stretch in some measures of house price valuation,” the BoE number two added.
The Deputy Governor’s warning comes after the Bank forced Metro Bank to correct how much capital it was setting aside to cover mortgages after under-reporting the risk from its loan book. Metro raised £375m to bolster its capital buffers earlier this month. Tesco Bank said this week it was quitting home lending due to tough competition, and Nationwide Building Society its measure of underlying profitability fell in the year to April 4th 2019.
Is Sub-Prime Lending Crisis on the Horizon?
Some analysts are predicting a future sub-prime crisis that could spark another recession as a consequence of a slackening mortgage market. Lending criteria has undoubtedly become more stringent since the financial crisis of 2008. However, there is now a slow return of 100% mortgages, which in a climate of rising inflation are quick to become unaffordable even with the slightest change of circumstances.
In past pre-crash cycles where sub-prime lending has been involved, the crisis has also been historically driven by banks selling their mortgage portfolios on to other banks. The problem comes when the quality of the mortgages sold is poor, leading to defaults and a fast-growing financial mess for the bank who bought them.
Lloyds to Sell Irish Residential Mortgage Portfolio to Barclays
As an alarming signal of what may transpire, analysts were to hear that Lloyds agreed to sell its Irish residential mortgage portfolio to Barclays for £4bn in cash as part of its strategy to become a UK-focused bank. However, it was noted that Lloyds said it would make a pre-tax loss of £110m on the sale, to be recognised in its first half results.
“The sale is in line with the group’s strategy of becoming a low risk, UK-focused bank,” Lloyds said. “Following the transaction, the group will have minimal exposure to Ireland and the total outstanding run-off portfolio will be around £4bn, less than 1% of the group’s loans and advances to customers.”
The sale includes £4.3bn in gross assets, of which £0.3bn are impaired. In 2017 the assets made a pre-tax loss of £40m. Proceeds from the sale will be used for general corporate purposes, the bank added.
AJ Bell investment director, Russ Mould, said the sale marks another example of how some banks are cleaning up their acts and focusing on the better parts of their business.
“The Irish portfolio made a £40m pre-tax loss in 2017 and was low-yielding so you can perhaps understand why Lloyds was eager to get rid of it. Strategically it also makes sense as Lloyds has a desire to concentrate solely on the UK,” he said.
“The £4bn sale tag looks a good price and better than analyst expectations. It is also the second Irish portfolio sale this week, with AIB striking a €0.8bn deal to get rid of a portfolio of non-performing loans.”
It is inevitable in uncertain economic climates that lending is made easier for consumers to stimulate new business. Lenders may be relaxing criteria in certain areas in order to generate new business, without determining if the mortgage is affordable to the borrower. Mortgage lenders and brokers have steered financial markets towards collapse both in 1987 and 2008 and the cautious investor is wise to steer clear. The fact is that residential property investment in the UK is no longer viable or lucrative and opportunities are few and far between.
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