Independent review and analysis

Lending growth in an uncertain economic environment

The mortgage market never seems to stand still! On the funding side in the last few weeks we have seen further applications for banking licences, increases in funding lines and significant securitisation issuance. On the credit side, we are seeing aggressive product pricing, credit risk expansion and the return of the off-site underwriter. These are all signs that many funders and lenders are increasing their volume aspirations.

Against such ambitions, the Bank of England’s EU withdrawal scenarios suggest that a “disorderly” Brexit could result in a deeper and more damaging recession than the 2008 financial crisis. The BoE, when looking at house prices and interest rates, suggests the following:

House prices

(Maximum fall from starting point)

 

Bank Rate

Average

over years 1 – 3

Peak level

Disruptive exit

-14%

1.5%

1.75%

Disorderly exit

-30%

4%

5.5%

BoE2018 stress tests

-33%

3.25%

4%

GFC(peak)

-17%

2%

5.25%

 

Many commentators have argued that the BoE analysis is too severe, but the warnings do help focus the minds of those responsible for credit policies and mortgage portfolio resilience. Such stark scenarios do enable appropriate risk mitigants to be planned, resourced and implemented.

The analysis also shows some positives in respect of mortgage book resilience, even in these extreme circumstances. For example, interest rates in a ‘disorderly Brexit’ scenario would peak at only 25 basis points above the peak in the global financial crisis. After the GFC arrears and repossessions were managed reasonably well – cases more than 3 months in arrears peaked at 2.4% in 2009 and repossessions peaked at 0.43% in the same year. Also, whilst the potential house price drops look extreme, they are below the BoE 2018 stress test rate. Additionally, the Financial Policy Committee revised its guidance, in June 2017, to test affordability at 3 percentage points above loan reversion rates rather than the Bank Rate. As a result, many firms have already been stressing affordability at more than 6% at a time when the predicted peak rate in a disorderly situation is 5.5%.

Not surprising then that the mortgage market appears to be in a strong place and that there is no shortage of mortgage market developments. However, we are seeing that funders are taking a more proactive approach to monitoring how funds are lent. Those steps include increased oversight of product and lending policy compliance and increased reliance on independent oversight/third line defences.

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