The Council of Mortgage Lenders (CML) warned that the rationing of mortgages will deteriorate in 2009. The CML felt that homeowners with mortgages were being forced to cope with a dysfunctional mortgage market. Last year the net mortgage lending mortgage refinancing 108billion and this year it is expected to be around 40billion, which is a 60% drop in net mortgage lending.
What is causing the mortgage market to be dysfunctional?
1. It started with the Credit Crunch which is defined as "a severe shortage of money or credit" back in August 2007.
2. The London interbank lending rate known as the Libor rate is still too high. This is the rate at which banks lend money to each other. The libor rate has been dropping slowly recently and it needs to be more in line with the Bank of England base rate.
3. The American Insurance Group (AIG) scandal that has now left all the banks struggling to borrow money as no one is willing to insure their obligations (mortgages) since the collapse of Credit Default Swaps or debt insurance contracts.
4. Property prices are falling monthly.
5. Many homeowners have properties with little or no equity due to the fall in house prices. There are currently no remortgage products available above 95% loan-to-value for homeowners wishing to remortgage.
6. Lenders have reduced their loan-to-value mortgage products available.
7. Lenders are only willing to lend to homeowners with a 100% clean credit history and they are scared to take a chance mortgage refinancing anyone with a blemished financial history.
8. Anyone with a subprime mortgage or poor credit history will struggle to find a mortgage lender willing to remortgage their homes. These homeowners will be left on their lenders worst rate the standard variable rate (SVR) paying over the odds. Some lender may offer an alternative mortgage product but it will not be competitive and will certainly come with high arrangement fees.
9. Banks and mortgage lenders are not passing on the full interest rate cuts as they are made by the Bank of England. The Bank of England has just dropped their base rate to 2% which is the lowest since1951.
10. First-time buyers are struggling to find any mortgages that only require a 5% deposit.
The government has tried to introduce new initiatives over the past few months and have already nationalised Northern Rock and Bradford & Bingley. They have also put vast amounts of taxpayers' money into the banking system and last week Alistair Darling announced further tax cuts in his recent mini-budget.
It is my belief that the government and the banks should now increase the number of shared ownership properties available to first-time buyers. If we can get the more first-time buyers to start buying properties then we can start to stimulate the rest of the mortgage market. Another solution would require banks to be brave and offer a 95% loan-to-value mortgage to first-time buyers without requiring a guarantor. Currently there are two lenders that are offering this kind of mortgage but they want a guarantor to protect themselves.
A lot of initiatives have been introduced and it takes time for these changes to take effect. As confidence returns so will these changes and let's not forget that we are in a worldwide recession.
Contributing author Mark Aucamp has been providing Talk Money Blog with regular money saving expert posts and comments. Mark is recognised as an authority in the field of Debt Management. Mark has extensive experience in providing Advice & Solutions. To see if your Mortgage or Loan is invalid and unenforceable go LoanCheck for a free appraisal.
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