Down, not under

Returning to the UK, it is clear there is more optimism in the air. House prices have stabilised, funding has eased a little and unemployment is not rising as fast has some had expected. The funding market for housing associations has improved – with a number of lenders becoming more active as pricing and supply have eased. Encouragingly Lloyds Banking Group successfully went to market with a residential mortgage-backed securities issue of more than £2.8 billion triple-A-rated assets though at considerable cost.

All of this might lead some to think all will be well again soon. But the fact is that the crunch is far from over – and the supply and cost of credit is still tight in many sectors. Volumes remain low by historic standards and lenders continue to be very selective.

Policing of credit standards remains high, so any potential borrower who previously missed payments will find it difficult to get a loan. And as the market improves, government will have to wind back its assistance and banks will need to repay the funding they have received.

This will be a delicate process. Even if it is done without disrupting the recovery, it does mean the net amount of funds available to lend will be constrained.

Also, we are only now beginning to see the shape of the regulatory response to the credit crunch. The Financial Services Authority’s mortgage market review discussion paper is about to be published and among its recommendations are likely to be controls on income verification and affordability. Regulatory capital requirements will be enhanced and so too will the terms under which securitisations take place. The upshot of all of this is that lenders will be less likely to offer higher risk products and that where they do they will cost more.

But there is more. Although Australia feels it has had ‘a good war’ in terms of escaping the worst effects of the crunch, it has witnessed a massive rationalisation of its banking sector with most of the smaller innovative ‘non banks’ being swallowed up by the four main banks. These banks now control the market with two out of the four doing around 90 per cent of mortgage lending.

Though UK rationalisation has not reached that level, a similar uncompetitive outcome is evident with the EU commissioner raising serious concerns about the current state of the market. Certain banks, including Lloyds, are being told to reduce their market share and this is forcing these banks to raise capital and sell business lines.

‘The world will not go back to where it was, so housing associations must learn to work within this new environment’

But since the cost of debt and the difficulties in accessing markets are forcing a number of firms to undertake rights issues and find other ways of raising funds, it is possible we will see banks with a growing appetite to lend.

The improvement in registered social landlord lending could show the way. Not only has the rate come down in the past few weeks, but the loan terms have lengthened. With more bond issuance under way, we are beginning to see some restoration of competition at least in this market and the London interbank rate (LIBOR) has fallen sharply. Loans for low-cost home ownership remain difficult, but even here there has been a slight softening as the market improves and staircasing receipts increase.

So there is some good news. But the world will not go back to where it was, so housing organisations must learn to work within this new environment. What housing associations must now do is concentrate on the basics – ensuring good cash management, helping tenants and residents to improve incomes and keep up payments,  keeping a close check on internal performance, diversifying funding resources and crucially managing stakeholder relationships – funders, local authorities, builders, contractors and many more. All have a vested interest in success and can be part of helping associations through the crunch.   

Peter Williams is executive director of the Intermediary Mortgage Lenders Association and Donald McKenzie is treasury director of Metropolitan Housing Trust.