The Banking Crisis - What Affect Will It Have On Mortgage Lending

There are worrying signs in the loans market at the present time. The current banking crisis has lead to concerns that mortgage customers will find it harder to get loans and in turn, with houses becoming more difficult to sell, prices will fall.

Central banks around the world, including the Bank of England, are pouring billions into the money markets in a frantic attempt to ease the credit crisis. We are all aware that the world is in the grip of a “credit crunch” which began in the US and has consequently caused problems throughout the world. As a result of poor lending decisions in the US and excessive defaults, many of the banks that have bought the loans in packages – under a process known as securitisation – now realise that they don’t know the quality of the loans they have already taken on, and have become nervous about lending any more to each other in case they fail to recover their money.

As a result, the supply of money needed to advance home loans to individual customers is drying up, with the whole credit system at risk of coming to a standstill. At present, the banks are facing a £30 billion shortfall next year. By pumping money into the system and inviting retail banks to bid for it, the central banks are hoping it will invigorate the industry and get the system moving again. Only time will tell if this strategy will work. Rachel Lomax, the Bank of England’s deputy governor, said the bank’s loan auctions have been “quite well received”.

However, Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets in Edinburgh, is less optimistic. “It’s going to take a long time for these problems to go away. These auctions might help to stem the pressure until year-end, but the bottom line is, until we get a clearer picture of how deep the problems are, the banks are going to hoard cash,” he said.

Chief economist at economic and financial analysts Global Insight, Howard Archer, believes that the housing market could see a sharp correction next year. This is already happening. According to property website Rightmove, house sellers are cutting prices at the fastest rate for five years. Nationwide, the UK’s largest building society, reported last November that in the previous month house prices fell at their fastest rate in 12 years. While this is bad news for sellers, it’s good news for buyers. This is of course providing they can get funding.

As to whether or not the central banks’ scheme to pump money into the system will work, that remains to be seen. Lenders will be eager to protect their margins, and if lending to each other remains tight the only other place they can raise money is from savers. In order to encourage them to deposit cash, they need to raise interest rates – with the effect that mortgages will become ever more expensive. Cut-price two-year fixed-rate home loans are seeming a thing of the past and mortgage borrowers who can’t find cheaper deals elsewhere face being forced on to lenders’ more expensive standard variable rates. For any new borrower who has a less than perfect credit score, it could become nearly impossible for them to borrow at all.

Lenders are tightening conditions all the time, with many now requiring a minimum 20% deposit. However, tighter lending criteria could be offset by a lower asking price for the property.