How long will it take for the mortgage market to settle down?
August 9, 2008
According to recent reports the mortgage industry in the UK could take several years to settle down, and industry officials have said that conditions in mortgage lending will never be as relaxed again as they have been over recent years. These relaxed conditions and the days of easy credit were brought to an abrupt halt late last summer, as the global credit crunch winged its way to the UK from the United States, and began to wreak havoc in the mortgage and finance industries.
The onset of the credit crunch had a particularly severe impact on the mortgage market. Lenders, who had previously been offering higher income multiples to borrowers, extending the repayment terms, and exercising very little caution over who to lend to, suddenly found that they could no longer easily secure funds on the wholesale money markets. Inter-bank lending became more difficult and more expensive, as lenders became cautious about lending to one another, and pretty soon mortgage lenders found that they could not secure adequate funding to finance their mortgage lending operations.
Pretty quickly the number of mortgage products on the market plummeted by two thirds, with lenders taking all sorts of mortgage off the shelves. Increased caution over higher risk customers resulted in lenders tightening up on their eligibility criteria, leaving many would be borrowers out in the cold. Despite three base rate cuts since December of last year many lenders have increased the cost of mortgage for new customers, driving up interest rates, increasing arrangement fees, and demanding higher deposits, with all lenders taking 100% and 125% mortgages off the shelves altogether.
Officials are now hoping that the mortgage industry will start to settle down, with the government having ploughed billions of dollars into the money markets in order to increase liquidity, as well as launching a £50 billion mortgage rescue plan to try and ease the problems in the money markets. However, some officials claim that this could take at least two year to take effect and that the problems in the mortgage market are still ongoing.
An official from the Building Societies Association recently spoke of the rescue plan, stating: “It will not in itself solve the credit crisis, it certainly isn’t going to reverse all the changes in lending policies we have seen in recent months, or restore mortgage lending to its former levels, but it should help to underpin confidence. It is vital for the Bank of England to remain very close to what is happening in markets, and it should not hesitate to intervene further and extend the facility if that is what is needed.”
An official from the Council of Mortgage Lenders said: “The next few months will remain very weak for house purchase activity for the funding reasons which are now well rehearsed. We still await first signs of the Bank of England’s special liquidity scheme indirectly helping to ease the current logjam.”
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