Intermediary lenders remain positive

Intermediary lenders remain optimistic about 2008, despite the current uncertainty in the market, reflecting the very positive fundamentals of high employment and strong housing demand that underpin the market.

Respondents to IMLA’s recent survey think remortgaging activity will remain buoyant, with over two-thirds of members thinking volumes will increase slightly or remain the same.

The survey showed lenders responding to changing market conditions with over 80% tightening criteria relating to loan-to-value ratios, and almost 60% tightening those relating to income and financial assessment.

Peter Williams, IMLA’s executive director, said: “Lenders have a realistic but optimistic perspective on the market, which will be supported by good levels of remortgaging activity and a reaffirmation of prudent lending practices. They are noticeably more upbeat about their own firm’s volumes than they are about the market as a whole, pointing to the considerable opportunities that remain within such a large market. With credit quality moving up the agenda and key to the reopening of the structured finance markets, lenders are tightening their lending criteria with regard to both LTV ratios and financial assessment.”

Asked about the factors needed for a return to normality in the industry, over a third of lenders stressed the importance of re-opening the securitisation markets, and over a quarter the availability of more liquidity in the market. Taken together it is clear the issues of liquidity and the need to restore functioning capital markets dominate their thinking.

By the end of 2008, lenders expect Bank base to be at least half of one percent lower than they thought at the time of the last survey in the summer.

Peter Williams continues: “IMLA members welcomed the MPC’s recent cut in base rate, and the more recently announced action by the Bank of England to provide greater liquidity to the market and at a more attractive rate. We believe the Bank of England has further potential to reduce borrowing costs and increase confidence. While Mr King and his colleagues must walk the tightrope between the risk of a slowing economy and the threat of rising inflationary pressures, we think the MPC can and should cut rates again, possibly as early as in January. This would clearly help boost market sentiment in 2008, which lenders believe is a key factor for the return of normality to the markets.”

“The differential between Base rate and LIBOR should contract further – although even by end 2008 it would remain wider than it has been historically. Forecasts for 2 year fixed rates, falling from 5.73% at end 2007 to 5.42%, provide further indication that we are moving into a downward phase for interest rates, which is positive news for homeowners even if it does presuppose a less buoyant economy.”

Looking at house prices, intermediary lenders anticipated the easing we have seen over the last quarter and forecast that prices will remain flat in 2008.

“Next year, the majority of respondents thought house prices would be stable, although that does represent an easing in real terms. 2008 will be a chance to take the foot off the accelerator and take stock, which should be a welcome development – but IMLA is not predicting a major slowdown because the fundamentals remain so strong. With record lending in 2006 and 2007 alongside strong house price increases some slowing was inevitable.” concludes Peter Williams.