Council of Mortgage Lenders

Key issues



Outlook for the mortgage market
Mortgage funding and the impact of the special liquidity scheme
Support for home-owners in difficulty
Sale-and-leaseback market
Reforming the safety net for borrowers in difficulty
Low-cost home-ownership
Conveyancying and valuing newly-built properties


  • Outlook for the mortgage market

    While forecasting even the short-term outlook for the housing and mortgage markets remains problematic, we have published updated forecasts to the end of 2008. We now expect:

    • house prices to be around 7% lower at the end of the year then at the end of 2007;
    • property transactions in England and Wales to be around 35% lower than last year at 770,000;
    • gross lending to be around 21% lower than last year at £285 billion;
    • net lending to be half last year’s level at £55 billion; and
    • the Bank base rate to end the year at 4.75%.

  • Mortgage funding and the impact of the special liquidity scheme

    The credit crunch has reduced the amount of wholesale and capital market funds available to mortgage lenders, and raised the price of these funds relative to the Bank rate.

    The special liquidity scheme introduced by the Bank of England aims to improve the liquidity position of the banking system and increase confidence in financial markets. Is it not, as Bank governor Mervyn King has himself pointed out, intended to “kick-start the mortgage market”.

    Take-up of the scheme during the six months in which it will be available is likely to be much higher than the £50 billion initially assessed by the Bank, and the scheme will remain accessible until October.

    It is not clear at this stage to what extent this additional liquidity might be recycled into mortgage products or pricing, so that lenders can bridge the gap between how much consumers want to borrow and how much funding is available. But it is clear that it will take time before the scheme’s full benefits feed through into the mortgage market.

    The recent trend of removing mortgage products and higher costs for new borrowers will be affected by how libor (the rate at which banks can borrow wholesale money to lend on mortgages) responds over the coming weeks and months. As yet there has been no improvement. As at 10 June, libor was 0.95% above the Bank rate - a more normal rate is between 0.2% and 0.3%.

    In time the liquidity scheme is likely to have a positive impact on the mortgage market, as well as on the banking system more generally. However, the price and terms of mortgage products will not return to those seen before the credit crunch. This is because:

    • lenders’ current pricing will take into account both funding costs and their change in appetite for risk in this less buoyant market; and
    • lenders will need to manage the continued high level of consumer demand against their reduced capacity to lend – this is exacerbated as a result of some lenders withdrawing from the market.

    While these factors will moderate, they will not reverse.

  • Support for home-owners in difficulty

    We recently wrote to the chancellor outlining the range of steps that lenders are taking to minimise the potential problems that may face some borrowers in the wake of the credit crunch.

    We continue to expect the number of mortgage arrears cases and repossessions to remain low – we have forecast 45,000 repossessions this year, which equates to around 1 in 300 mortgages. But the situation is clearly worse than it was before the credit crunch, and the shortage and cost of mortgage funding will affect some borrowers coming off low-rate deals by increasing their monthly payments more than they might previously have expected.

    Repossession is already a last resort. FSA rules require all lenders to have arrears management policies that are designed to avoid repossession except where realistic alternatives are not possible. But these are not delivered in a single standard approach, and will differ between lenders. To ensure all possible avenues are being followed to minimise difficulties, the CML is undertaking a wide range of activities as set out in our letter. And our members have committed to four significant specific measures, namely:

    • To analyse their existing arrears management policies and implement any changes identified as a result of the industry guidance that we are preparing.
    • To provide information for consumers on their own arrears management process to help borrowers understand what to expect and how they will be treated fairly.
    • To support the principle of a pre-action protocol for mortgage cases for use before court proceedings, providing an additional assurance that only appropriate cases go to court.
    • To inform borrowers in good time when they are coming out of initial deals onto higher rates with increased monthly repayments, and encourage them to make contact if a financial problem is likely to arise.

    Borrowers can also do a great deal to help themselves, by ensuring they make contact with their lender as soon as they realise they may face difficulties, by continuing to pay as much as they can even if they cannot meet their full mortgage payment, and by seeking advice to help them prioritise and manage their debts and maximise their income.

    We will continue to work closely with Ministers, and look forward to a clear statement of the government's own position on the safety net for borrowers.

  • Sale-and-leaseback market

    We have been lobbying with Shelter for statutory regulation on the sale-and-leaseback market. We therefore welcome the announcement in May that the Office of Fair Trading (OFT) is undertaking a market study into this sector.

    These schemes allow borrowers to sell their homes to a company and then to remain in the property leasing it back. However, we have a range of concerns about the way some sale-and-leaseback firms operate.

    Properties are often purchased at a discounted price, stripping out equity when a home-owner may already be in debt, sometimes with no independent valuation. Former home-owners are usually offered leases on an assured shorthold tenancy which gives them very little security of tenure. There are also concerns about the legal and financial advice home-owners receive as well as advertising standards.

    We hope the OFT’s study will be completed in September as promised and acted on quickly. It is important that we have effective regulation of this sector to provide protection for these potentially vulnerable consumers as soon as possible.

  • Reforming the safety net for borrowers in difficulty

    Another important strand in the safety net of support for borrowers is help from the state for both tenants and home-owners struggling to meet their housing costs. State support for home-owners was scaled back dramatically in 1995. Currently few borrowers are protected by income support for mortgage interest (ISMI), and even those who qualify will not receive any help with their housing costs for the first nine months. Support is also limited to interest payments on a mortgage of no more than £100,000.

    In the current market conditions, it is unlikely that a borrower unable to pay their mortgage will be able to remain in their home for as long as nine months without facing a claim for possession. Making ISMI payments available to those in need more quickly, and reducing the cap so that it covers interest payments in full, would help to reduce a rise in the number of possessions.

    In our discussions with government, it has previously argued that reforms should be “cost neutral”. The reality is, however, that more generous payments of ISMI could be offset by lower costs for the government arising from homelessness and an increase in the number of people claiming housing benefit. Another option would be to consider using second charges as a means of recovering higher costs to the government.

    The Department of Work and Pensions' proposals to reform ISMI and to implement improvements to state support remain urgent for those borrowers committed to staying in their homes who face a short term loss of income.

  • Low-cost home-ownership

    We welcomed the announcement in the government’s draft legislative agenda for 2008/09 of plans to provide more help for first-time buyers.

    One of the key measures was that in future all first-time buyers with an income of less than £60,000 will have the opportunity to apply to buy a share of their home. The prime minister also announced an allocation of £200 million for the Housing Corporation to buy new properties on the open market. These homes will be available either for first-time buyers to purchase through the homebuy scheme or for social renting.

    Although this level of funding will have only a modest impact on the housing market, it does have the potential to widen the first-time buyer shared equity scheme.

    These announcements mean that the government is now proposing a more logical approach to help for first-time buyers, providing assistance based on the income rather than the occupation of buyers. The proposals will also remove the anomaly by which helping one group of less well-paid workers makes access to home-ownership more difficult for others earning similar salaries, but working in different jobs.

  • Conveyancying and valuing newly-built properties

    Some lenders have been concerned that the valuation and conveyancing processes do not always capture discounts and other incentives that buyers may be able to negotiate with developers when purchasing newly-built property. This may mean that, in some instances, lenders might unintentionally offer a mortgage based on a valuation of a property that is higher than the true price paid for it.

    For this reason, we are introducing new standards for industry professionals who act for lenders on newly-built property transactions. The new procedures, which come into effect on 1 September, will ensure that the conveyancing and valuation processes capture the true value of the property, reducing risk for both borrowers and lenders.

    Lenders will require builders or developers of any newly built, converted or renovated property to complete a new 'disclosure of incentives' form. This will be reinforced in our Lenders' Handbook, which sets out specific requirements for conveyancers acting on behalf of lenders in property transactions.

    We have been working with surveyors and house-builders to ensure that the valuation of new properties is more reliable and robust. In September, the Royal Institution of Chartered Surveyors will be amending its guidance to members to reinforce the requirement to disclose incentives to lenders. The Home Builders' Federation and Homes for Scotland have recently reinforced their own codes of conduct to encourage greater transparency about discounts and other incentives. And a number of major builders are taking their own steps to address the issue.

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