While the end of 2004 and early 2005 appeared to indicate a gloomy future, mortgage activity picked up in the latter half of 2005 and there are now clear signs that the mortgage market is slowly recovering. Datamonitor expects flat growth of the mortgage market over 2006 and 2007, followed by faster growth from 2008, reaching GBP324.1 billion in gross advances in 2010, with GBP138.5 billion in house purchase loans, GBP140.9 billion in remortgaging and GBP44.7 billion in secured lending.
Arrears and repossessions on the increase
Bad debt has always been a concern for lenders. But in the current economic climate, such a concern has become all the more important. The worry is that should consumers start to buckle under the weight of their debts, bad debts could rise, hurting lenders' overall profitability.
After over a decade of decline, arrears and repossessions are now increasing. Since 2004 the number of cases of mortgages in arrears has increased - from 92,090 to 105,990 in 2005, according to the Council of Mortgage Lenders.
Moreover, repossessions rose from 3,000 in the second half of 2004 to 4,620 in the first half of 2005, marking the first increase in repossession levels since the first half of 1998. Many lenders are now taking precautions - tightening their acceptance criteria and processes in order to cope with an uncertain future. Nevertheless, it is important to mention that while bad debts have been noticed on a number of lenders' unsecured portfolios, bad debt on mortgages have so far been minimal, if any at all.
Regulation put further pressure on lenders
The mortgage market has seen a host of new regulatory measures come into play over the past few years. Indeed, their presence has been strongly felt and has had profound impact on the mortgage market, particularly with the implementation of the Financial Services Authority's Mortgage Conduct of Business requirements, launched in October 2004.
However, mortgage lenders will have to adapt to a number of additional regulations set to be implemented over the next few years, namely the Treating Customers Fairly initiative, Home Information Packs, Basel II, and possibly further amendments to how mortgage payment protection insurance is sold.
Such regulation will be challenging for lenders, as adaptation will be both time consuming and costly. While regulation serves to clean up the market, turning it into a more efficient, fair and consumer-friendly arena, regulators must work hard to ensure that such regulation does not dampen the competitive nature of the UK mortgage market, as it will be consumers who end up suffering the consequences in the end in terms of higher rates.