The committee will have had sight of the draft Quarterly Inflation Report, to be published in 6 days time, and so today’s decision to extend the QE programme by £25bn suggests there is little, if anything, in the Report in the way of optimism to counterbalance the depressing third quarter GDP figures showing that the UK has now been in a recession for the longest period since records began, and on the watch of the man who claimed he had abolished boom and bust!

However, the fact that the intention is to take 3 months to spend this extra £25bn, compared to the £50bn spent in the last 3 months, indicates that the MPC is at least less bearish on the outlook for the economy than it was 3 months ago.

Fortunately the picture for mortgage borrowers looks a little brighter, despite Libor rates having edged up over the last month, with 3m Libor up from 0.55% to 0.60%, and swap rates having risen quite sharply. For example 2 year swaps are 0.30% higher at 2.07% and 5 year swaps are 0.35% up at 3.45%.

Despite these significant increases in swap rates both fixed and tracker mortgage rates have fallen over the last month. Prior to the credit crunch increases in wholesale rates on this scale would certainly have resulted in the cost of fixed rate mortgages rising. The two reasons why they have not are that savings rates are now funding a much higher proportion of mortgage lending and competition in the mortgage market has increased considerably.

Taking the 5 year savings bond market as an example, according to Moneyfacts 7 banks or building societies are offering a rate of 5% or over, with the top rate being 5.35% from Skipton B S. Although competition in this market has increased to the extent that the number of banks or building societies offering over 5% has grown, the top rate available has remained in the very narrow range of 5.3-5.4% for several months. The relative stability of savings rates has helped to avoid mortgage rates increasing.

Couple this with the significant increase in competition over the last month from a resurgent Northern Rock, which has been cutting some rates twice a week. The impact of that competition has been to force other active lenders to cut their margins on new lending or miss their lending targets. Some have chosen to offer more rates at the higher LTVs rather than compete too aggressively for lower LTV business and so borrowers across the LTV spectrum have benefitted.

Northern Rock’s third quarter statement yesterday said that it’s gross lending in the first 9 months of this year was £2.3bn. Now terms have been agreed with the EU it wants to get as close to £4bn as it can for 2009 lending and its 2010 target is £9bn. The deal agreed with the EU is that it will not have any mortgage products in the Moneyfacts top 3 for the relevant category but this does not come into force until January next year and its old limit of 2.5% of total gross lending is effectively redundant. Thus it has a window until the end of the year to be as competitive as it needs to be to hit its targets.

This is having more impact on competition in the mortgage market than is likely from the forced sale of some Lloyds Banking Group and RBS branches, and at a time when the extra competition is badly needed.

Northern Rock’s 4.99% 5 year (to 31/12/14) flexible fixed rate up to 70% LTV looks attractive for borrowers wanting the security of a fixed rate but despite the cost of 2 year fixes also falling, short term fixes such as these offer few attractions compared to the significantly cheaper rates available on the best trackers, with lifetime trackers in particular looking attractive.

Standard Life Bank is one of the few lenders still offering mortgages with fixed rates for longer than 5 years and is also one of a relatively small number of lenders still in the Buy-to-Let market. It is still a young bank, having been launched only 11 years ago, but has been innovative, with one of its initial products being a 25 year capped rate mortgage. However, its rates have been uncompetitive for some time, which is an indication it currently has little appetite to lend.

In the current market the stronger banks like Barclays are in prime position to pick up assets cheaply and that is certainly what Barclays appears to have done here. It is paying £226m for the profitable Standard Life Bank, based on its estimated £293m of tangible net assets, i.e. a 22.9% discount to net asset value.

With outstanding mortgage balances of £8.8bn Standard Life Bank only has about 0.7% of total UK residential mortgage balances but its average indexed LTV of 48% indicates a good quality book. A better assessment of quality could be made if a breakdown of the proportion of mortgages in different LTV bands was provided, but even though Standard Life offered mortgages to 100% LTV it only offered these to a fairly limited range of professionals and so I would expect even its high LTV book to be of good quality.

As foreshadowed in that blog I will now comment on aspects of the MMR other than self cert and fast track.
In the foreword to the MMR the FSA says “We recognise that the market has worked well for many consumers: the vast majority of mortgage borrowers will come through this recession meeting their mortgage payments.”

This should be born in mind when assessing the changes the FSA is proposing. Although regulation obviously needs to address issues at the lowest common denominator level, that should not be at the expense of an unnecessarily negative impact on the “vast majority” of mortgage borrowers by piling extra costs on firms, which inevitably will be passed on to consumers. It also should not prevent a consenting borrower from entering into a contract with a consenting lender, subject to appropriate safeguards.

Defining what those safeguards should be is a challenge but a good starting point is the requirement in The Financial Services and Markets Act (FISMA) that the FSA should have reference to the “general principle that consumers should take responsibility for their decisions.” They can only be expected to do this if the benefits and risks of any particular mortgage are explained clearly to them and it is encouraging that the FSA now recognises that consumers do not use the KFI as they intended, i.e. for shopping around, but mainly rely on the oral advice or information they receive.

Most lenders already base the maximum amount they will lend on an affordability calculation, sometimes using actual expenditure as disclosed by the borrower and information from the credit reference agency and sometimes using averages from the National Audit Office. The FSA wants to go much further and make the mortgage application process far more intrusive by requiring borrowers to disclose not only committed expenditure (which lenders generally already require) but also discretionary expenditure on “food and drinks, alcohol and tobacco, clothing and footwear, household goods and services, health and personal care, transport, recreation, culture, restaurants and hotels, holidays and other miscellaneous goods and services.”

Going through a detailed budget planner with some clients, particularly first time buyers, can be a helpful exercise for the client as well as the adviser, but for others a regulatory requirement to do so is insulting. Advisers and lenders should be given discretion as to how much of this detail is necessary, depending on the client’s status. In any case most people don’t say that my discretionary expenditure is £x and so I have £y left for my mortgage. They look at how much their mortgage and other committed expenditure is each month and then work out how much is left to spend on non essentials or save.

Furthermore, rather than trying to micro manage people’s budgets, the interest rate assumed for the affordability calculation is much more important. The FSA is prescribing 2% as the increase in rates to use for affordability purposes but the danger of this is that by specifying a rate some consumers will rely on it for their own budgeting purposes. For anyone taking out a tracker today a 2% increase is too low a rate to use, whereas for someone taking a 10 year fix it would be fair to use the actual rate they are paying.

The FSA is also proposing that all affordability calculations should be based on a 25 year repayment mortgage. Why? With the retirement age increasing it will be perfectly feasible for people to take out a mortgage for a longer term than was sensible a few years ago. If a 25 year old with a retirement age of 68 wants a 40 year mortgage to keep initial costs down what is the problem?

The FSA has recognised that many borrowers whose mortgage is processed on a non-advised basis think they have had advice and also that some sales recorded by firms as non-advised are really advised. It accepts that some consumers do not want advice and it would be wrong to force them to have advice. It therefore proposes retaining both advised and non-advised sales but enhancing “the protections consumers have in a non-advised sale by imposing a basic standardised affordability and appropriateness test.”

This seems sensible but I worry that if the information on discretionary expenditure demanded from clients for an advised sale is as intrusive as the FSA proposes more clients will choose the non-advised route. I suspect this is the exact opposite of what the FSA would like. Once a borrower has been asked more questions about affordability he/she will be even more likely than now to think they are getting advice to take a particular mortgage. Most lenders aren't keen to offer advice to their direct customers because of the more onerous regulatory and staff training requirements and so any extra questions they have to ask the customer will present a challenge to lenders (and those brokers who do primarily non-advised sales) to make sure their customer knows they are not giving advice.

The proposal to require all mortgage advisers to become approved persons with individual broker registration is very sensible and should enable the FSA to deal much more quickly with the minority of rogue elements in our profession. The only surprising thing is that the FSA choose not to do this from day 1, in line with the policy of its non statutory predecessor, the Mortgage Code Compliance Board.Gordon Brown’s proposal early this year to cap LTVs at 90% was naïve and this review very sensibly recognises that LTV caps would be inappropriate. Affordability is the key issue and proper risk based pricing is required for higher risk mortgages, not a ban. Logically if mortgages above 90% LTV were banned all unsecured lending would have to be banned as well because that type of lending is obviously even riskier!

Likewise, once it is accepted that affordability based lending is appropriate a loan to income cap would have been superfluous.Some of the changes the FSA is proposing are no doubt partly based on its re-assessment of the role of the consumer. Previously it assumed consumers would act rationally to protect their own interests but now it believes consumers have "behavioural biases.” Because the loan is a means to an end, for example a home or a car, they fail to focus on the details of the loan and hence the regulator needs to become "more interventionist to help protect consumers from themselves".It also suggests that consumers need "re-educating away from the idea that renting is bad and home ownership good, and away from seeing property as an investment." I suspect it will struggle with that one!The FSA suggests its scope should be extended to regulate second charge mortgages and buy-to-let (BTL) mortgages. The former is long overdue and it is almost unbelievable that the reason The Treasury originally decided that the FSA should not regulate second charge loans was that “your home is not normally at risk with a second charge loan.”

Bringing BTL mortgages under the FSA umbrella will pose many challenges and when The Treasury consults on this shortly I expect the responses to be much more mixed than those which will be received on second charge lending. BTL is an investment and so should the regulation be as an investment or as a mortgage, or both?

There is a huge difference between the amateur landlord with one or a few properties and the professional with perhaps over 100. If one is going to regulate mortgages for the landlord with, say, 100 residential properties and also a couple of shops or office blocks, why regulate one but not the other? I think it may be necessary to find a way of regulating BTL mortgages for the amateur landlord but not the professional, which then presents the problem of where to draw the dividing line.

The FSA says that “We are not seeking to pre-empt the outcomes of the debate: the aim is to stimulate a wide-ranging discussion.” Unlike the Government, whose so called consultation papers have often been a sham (just think of HIPs) the FSA has demonstrated a willingness to listen to responses to its consultation documents. For example the final version of MCOB had some significant changes from the original and more recently the huge response from brokers, encouraged by AMI, to the massive increase in FSA fees originally proposed for brokers for this year resulted in much revised figures with only small increases.

Therefore I would encourage every reader to engage with the FSA and answer the questions summarised in Annex 1 by the deadline of 30 January. Why not also encourage clients who think they will be adversely affected by any of these proposals to also respond to those questions which concern them. The more responses to this discussion paper the FSA gets the more influence they will collectively have on its final rules.

Maybe Mr Cable has a short memory or maybe he is just not very familiar with the mortgage market. Either way if he had done a little research before calling for “stakeholder” style mortgages he would have discovered, or reminded himself, that the Government launched just such a scheme along these lines at the end of the last decade. They were called “CAT Standard” mortgages and bombed in a big way. Nationwide and HSBC were the only two lenders to embrace the CAT Standard and all their mortgages complied with it.

Other lenders either ignored CAT Standards or, if they wanted to be politically correct, launched a token product. After a while Nationwide very cleverly found a way around the rules banning ERCs on variable rate CAT mortgages by adding a very high, and hence almost worthless, cap to its trackers, which allowed it to include an ERC on these mortgages.

CAT Standard mortgages subsequently disappeared from the market for the very simple reason that the costs for lenders of meeting the CAT criteria meant they either had to price such mortgages at an uncompetitive level or take a margin hit. Consequently sales of the lone CAT Standard mortgage offered by some lenders were abysmally low because other products in their ranges offered better value for most people. In due course Nationwide and HSBC aborted CAT mortgages to avoid being at a competitive disadvantage.

All of the criteria required to meet the CAT standards had merit in themselves but few borrowers needed all the features and that was the issue. Most borrowers who bought a CAT Standard mortgage were effectively paying for every CAT feature because each feature had a cost and it was all or nothing. Thus nearly every borrower who bought a CAT mortgage paid over the odds.

Why anyway is Mr Cable trying to reinvent the wheel? Even in the current market borrowers who want a simple mortgage have a choice of several - they are called lifetime trackers, and are offered by HSBC, Woolwich, First Direct, Abbey and several smaller lenders. Many of these lifetime trackers offer excellent value, including some on an offset basis. However, no doubt Mr Cable would not class an offset mortgage as simple and would therefore dismiss it, even if it was offered at a cheaper rate than its non offset equivalent, as was the case with Woolwich lifetime trackers as recently as August this year.

If Mr Cable ever has further thoughts about calling for a new mortgage product he should consult a good independent mortgage broker first to check whether the market is ahead of him.