Funding for lending – success or failure?

There is disappointment in the UK residential property industry that the government’s flagship Funding for Lending scheme has not yet injected more money into the system but experts say it still needs time.

The latest figures from the Bank of England show that some 27 lenders increased their lending in recent months while 13 reduced and this includes big players such as Lloyds Banking Group, Royal Bank of Scotland and Santander.

In the first quarter of 2012 despite £2.6 billion of further funding there was a fall of £300,000 across the Funding for Lending scheme’s 40 participants. ‘You could be forgiven for thinking that much of the recent excitement over a broad based pick up in the housing market is being overdone. True, the latest data was a little above both the February and March numbers but it was lower than in each individual month during the final quarter of 2012,’ said Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors.

But he does believe the market is in recovery as seen by an increased volume of traffic now going through estate agents show in the latest RICS housing market survey. ‘This has historically been a good lead indicator of future mortgage activity and, in April, it climbed to its best level since the back end of 2009.  Alongside this, expectations for future sales are also on the rise,’ he explained. ‘If this more upbeat mood was not backed up by a fundamental improvement in the funding environment, we might be inclined to be a little more sceptical about this positivity. But the combination of both lower mortgage rates and a rise in LTVs on offer does provide a solid rationale why buyer interest in now a little stronger,’ he said. ‘We expect this to be reflected in mortgage activity data over the coming months. For the whole of 2013, we are now anticipating sales of around 980,000 compared with 930,000 last year,’ he added.

Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said on balance, credit conditions in terms of pricing and availability have improved under FLS and recent trends in mortgage applications and approvals suggest there will be further improvements in 2013. He pointed out that it remains a scheme with a limited lifespan, due to end in January 2015, and therefore would never have been enough on its own to fuel recovery. He also said that it will be joined by Help to Buy mortgage guarantee scheme to assist higher loan to value (LTV) loans in January 2014. ‘So for one year we will have an even stronger boost. On that basis we can be reasonably optimistic about the market in the short to medium term,’ he explained.

Simon Crone, vice president commercial at Mortgage Insurance Europe at Genworth, described the figures as disappointing. ‘The figures show that lenders are not passing on the subsidised tranches of funding to their borrowers. Of the 40 lenders now involved in the initiative, just over a quarter accessed the funds in the first quarter and this reticence is particularly puzzling given the forecasts for positive lending growth at the beginning of 2013,’ he pointed out. ‘This Bank update shows that, despite all the protestations to the contrary, lending is still flat lining and lenders, predominantly the banks, remain reluctant to increase their activity and it is borrowers, and first time buyers in particular, who will continue to suffer,’ he added.

Overall the Bank of England figures show that there was a small rise in mortgage approvals in April but this has also been received by experts as a further sign for optimism. ‘The small but significant rise in mortgage approvals in April is not momentous by any standards but there is a growing sense that the mortgage market is taking steps in the right direction. Lending is inching up on an annual and monthly basis which is really encouraging,’ said Paul Hunt, managing director of Phoebus Software.

In spite of the lack of economic growth and amid growing roadblocks in the property market, the lending industry has found a way to sustainably and significantly boost activity in the property market,’ he explained. ‘It is likely there will be further progression in the mortgage market at this rate, as activity grows thanks to the Funding for Lending scheme and Help to Buy which should kick start the housing market from the bottom tier,’ he added.
Williams of the IMLA said that the fact that remortgaging deals, rather than house purchases, continue to make the early running in 2013 is interesting. So far this year the number and value of remortgage approvals has grown every month from £25.8 billion in January to £30.3 billion in April, whereas purchase activity is still below the marker set in January when it was £54.5 billion. ‘Despite this, we have at least seen purchase volumes improve for three successive months and recover to £53.7 billion in April.

Spring is traditionally a good time to put your house on the market, and with lenders competing to outdo each other with favourable rates and special deals, there is every hope we will see this trend continue,’ he explained. ‘Every passing month brings the Help To Buy mortgage guarantee scheme closer to becoming a reality, with a lot of operational details still to be determined, not least the issue of capital relief for standardised lenders. This is crucial if government wants medium to smaller lenders to fully support the scheme,’ he added. ‘Given the many system changes lenders will have to introduce to deal with the guarantee it is vital that arrangements are settled in the next two months at the latest,’ he concluded.