Page last updated at 18:39 GMT, Tuesday, 4 December 2007

Lenders insist future is 'golden'

By Jennifer Clarke
Personal finance reporter, BBC News

Gold bar and coins (generic image)
The CML praises the UK's "gold-standard" mortgage market

"Going for gold" is the unexpectedly upbeat theme of the seventh annual Council for Mortgage Lenders (CML) conference.

Delegates take their seats to the strains of Shirley Bassey's Goldfinger, one of a medley of songs with a golden connection.

Given the well-documented problems in the financial markets, and the widespread belief that the UK housing market is slowing sharply, it seems a perversely optimistic message.

But according to CML Chairman Jon Pain, the precious metal offers an apt metaphor for the current credit crunch.

Our gold-standard mortgage market is unreasonably suffering the effects of investor nervousness, about the 'fool's gold' of US sub-prime
Jon Pain, CML
He quotes Shakespeare's famous line about "all that glisters" not being gold, something he says the world's banks are coming to terms with as they nervously eye up each other's "treasure".

Investors worldwide are trying to divine who has been left with "24-carat assets" and who is stuck with "base metal" as a result of their exposure to the US sub-prime market.

He has one more metallic metaphor up his sleeve.

"Here in the UK," Mr Pain says, "our gold-standard mortgage market is unreasonably suffering the effects of investor nervousness, about the 'fool's gold' of US sub-prime."

This is his key message.

Despite what he calls the "underlying quality and strength" of the British mortgage market, he predicts 2008 will prove challenging for everyone - lenders, brokers and consumers alike - especially if house prices remain flat, or turn negative.

Fitness test

Unsurprisingly, given the current problems, there is also some criticism among the gilded words.

The market which will emerge after the credit crunch will have much less capacity, much less competition and more sensible pricing
Stephen Knight, founder, Checkmate Mortgages

There is criticism of the government, market watchdog the Financial Services Authority, and the Bank of England for their handling of the global funding problems, and in particular the Northern Rock crisis.

But the CML acknowledges that lenders also have a part to play in restoring confidence.

Despite ongoing concern about a lack of liquidity threatening to slow lending next year, it insists "big market opportunities" remain for those companies who can rise to the challenge.

The conference's keynote address provocatively asked who will survive the present "blood in the water".

Stephen Knight, formerly chairman of loans firm GMAC and founder of Checkmate Mortgages, answered his own question.

Those who will make it are those who innovate, who embrace technology, and who learn to price risk more effectively, he explains, adding that greater consolidation in the industry is inevitable.

"I think the market which will emerge after the credit crunch will have much less capacity, much less competition and more sensible pricing," he said.

Retention, and the way that we treat our existing customers will be a major focus for the industry over the next 12 months
Matthew Carter, Nationwide

But with the capital markets languishing in what he calls a "complete coma", he warned that lenders who rely on this route for their financing face a tough future.

In contrast, he suggests lenders with a strong balance sheet, underpinned by retail saving deposits, should benefit.

"It offers a major opportunity for balance sheet lenders to clean up while the wholesale lenders have got to tread water," he said.

Golden opportunity

Matthew Carter, director at mortgage lender Nationwide, agrees that "innovative well-capitalised" lenders should be able to prosper as long as they can quantify risk properly.

But he believes an increasing focus on higher quality loans will squeeze some borrowers out of the market.

The strength and depth of the credit crunch is having a real impact on borrowers' lives too
Steven Crawshaw, Bradford and Bingley

That means one challenge facing lenders will be to keep hold of their present borrowers in what he believes will be an "extremely competitive" remortgage market.

"I think the challenge of retention, and the way that we treat our existing customers, will be a major focus for the industry over the next 12 months," he said.

Steven Crawshaw, chief executive of the Bradford and Bingley, also warned his fellow lenders not to lose sight of their customers amidst their concern about capital.

"Remember," he said, "the strength and depth of the credit crunch is having a real impact on borrowers' lives too".

Fighting talk

But Mr Crawshaw, who takes over the chairmanship of the CML in the new year, acknowledged the relationship between lenders and borrowers was unlikely to run smoothly in 2008.

As long as the current funding difficulties remain, some people will struggle to borrow money or remortgage in the months ahead. And that will inevitably lead to criticism.

"I think we're going to start the year defending the industry against all the people who've been lent to who we should never have lent to," he said.

"But I've got a lurking feeling we might close the year being beaten up for not lending to the people that the government then decides we should have been lending to during 2008."

Nonetheless, despite the expected difficulties ahead, Mr Crawshaw and his fellow lenders remain confident that the current market turmoil poses more than just a threat.

The challenge he and his colleagues face is learning to turn a golden opportunity into an equally bright reality.


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