Ripples of subprime still wash on England's shores
Duncan Webster found the perfect weekend house in Ardleigh, a village in the southeast of England. The train ride to the global wealth management firm he helps run in London is not too long and the cost of living is not too high. The barn conversion he made an offer on goes for the equivalent of $445,000 and needs $160,000 more for refurbishment fees. Webster, for his part, does OK. He has 30% down. He's ready to go. Webster also doesn't see much risk: No other completed barn conversion sells for less than $1 million in the village. Forty-nine of the 50 mortgage lenders Webster's broker approached for a mortgage don't feel the same way. Only one, Drummonds Bank will even consider the application, such is the risk aversion currently in place in the English residential mortgage market. "I could have my business finance the investment, but I would like to finance, like anyone else, my mortgage via debt," he said. "The Royal Bank of Scotland owns Drummonds and, like other lenders, has a government mandate to lend, but considering only one of 50 will even consider my application, there seems little chance of getting approval." According to Webster, homeownership is still as important to the English as Americans, but the similarities end after that desire. During the annual lunch of the Building Societies Association, a trade association, representing mutual lenders and deposit takers in the U.K., Chairman David Webster (no relation), said additional regulatory reform would mean "overkill" for an already struggling market. "Net advances in the residential mortgage market have fallen from an annual figure of around £110 billion ($178 billion) in the four or five years running up to 2008 to perhaps £10 billion ($16 billion) this year," he said. "Few U.K. industries will have experienced such a precipitous decline in activity. "Given the huge changes in the markets we have already seen, does the regulatory revolution represent overkill?" he asked. "Yes, there were certainly examples of irrational exuberance on the part of institutions in the run-up to 2007, but there are also currently examples of irrational pessimism on the part of regulators as they seek to address the problems of recent years in what might be far too restrictive a manner, given the need to create the conditions for continued economic recovery." And while British lenders are now notoriously adverse to any loan considered subprime, or nonconforming, the numbers for other mortgages are not exactly encouraging either. According to the Council of Mortgage Lenders, which represents 95% of the market, there were 50,000 loans for house purchases (worth $12 billion) approved in September, unchanged by volume but down $0.32 billion in value from August. The number was down around $1.6 billion from September 2009 but the value was up $0.4 billion. Loans for remortgage increased from 25,000 (worth $4.8 billion) in August to 29,000 (worth $5.78 billion) in September. Refinancing accounted for 29% of total lending in September, the first proportionate increase since May. The CML states that an inability for some borrowers to access new refinancing deals means there is little prospect of a significant rise in refinancing in the coming months. "With lending volumes at historic lows, stability in the mortgage market is the name of the game at the moment," said Michael Coogan, director general of the CML. "With both consumer demand falling and funding capacity limited, neither supply nor demand look likely to feed through to any significant improvement in lending volumes as we head into winter." And mortgage financing is not likely to pick up by year's end as it is the beginning of the slow season for the securitization markets as well, according to Jean-David Cirotteau, a credit analyst for Société Générale. "No new deals were placed or announced last week," he said. "Market participants are not willing to add to their positions at this time of the year." For existing U.K. RMBS, that consists of subprime collateral, Deutsche Bank reports that credit is improving and delinquencies are falling. Prepayments are at extremely low levels and loss severities are leveling off. Nonetheless, trepidations remain. "Higher unemployment, weaker household finances and house price growth may rub off on performance," report London-based analysts Ivan Pahlson-Moller and Conor O'Toole. "A continued low rate environment is likely to prove credit supportive and help offset these negative effects however." Good news for current mortgage bond investors, but unlikely to help subprime mortgage applicants close. Write to Jacob Gaffney. The author holds no relevant investments.