Mortgate rate must be below 10% to spur housing dev’t – Aliyu

The Chairman of a leading property development and management company, Urban Shelter Limited, Malam Ibrahim Aliyu, has said the potential for housing in Nigeria will not be realized until the current mortgage rate is brought down below 10 per cent.

Malam Aliyu stated this during a courtesy visit on the company in Abuja recently by officials of Media Trust Limited, publishers of Daily Trust and other titles, led by its Chief Executive Officer, Malam Mannir Dan-Ali.

The Urban Shelter Limited chairman said if government borrowed less, interest rate in the country is lower and the cost to borrow to finance housing (mortgage rate) is also much lower – between 9-10 per cent – the potential for housing in the country could be realized.

“Our mortgage rate must be around or about 9 per cent and this can only come about when inflation is lower and inflation can be lower only if government is not borrowing at the kind of rate we have seen in the last 15 years,” Malam Aliyu said.

He said the development of housing was a critical factor in the development of any economy and that Nigeria has substantially lagged behind in that area primarily because the issues around finance have not been tackled.

“There’s no way you can get extensive housing finance if you do not have a good mortgage system. You cannot have a good mortgage system if you cannot borrow at an interest rate that is less than two digits: nine per cent or less.

“The main reason why such mortgage funding is not available is because government is borrowing extensively at rates of 12 per cent and up to 15 per cent. There is a need to moderate this. It will help to moderate inflation and bring the mortgage rate down which can proliferate housing development,” he added.

While commending President Muhammadu Buhari for signing the new Executive Order 007 that permits private companies to fund major road construction projects and in turn get tax credit, Aliyu urged government to further expand infrastructure financing opportunities.

“I think Mr. president is in a wonderful position to recognize that infrastructure is important. The government cannot do it alone. Government has started to recognize this. They should go further. The Executive Order 007 is an important development. The only limitation is that they have taken only one means of financing infrastructure,” he noted.

Source: Dailytrust

Mortgage rates slide to 13-month low, luring Americans back into the housing market

Rates for home loans fell, with no bottom in sight as investors increasingly brace for slowing economic growth.

The 30-year fixed-rate mortgage averaged 4.28% in the March 21 week, mortgage guarantor Freddie Mac said Thursday. That was down 3 basis points during the week and a 13-month low for the popular product, which has managed a weekly gain only twice during 2019.

The 15-year adjustable-rate mortgage averaged 3.71%, down from 3.76%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.84%, unchanged during the week.

Fixed-rate mortgages follow the benchmark U.S. 10-year Treasury note TMUBMUSD10Y, -0.15%  , although they move with a bit of a lag. Investors have been piling into bonds over the past week, betting on a more dovish stance from the Federal Reserve.

That turned out to be the right call. After the release of the central bank’s statements, bond prices jumped, pushing yields down sharply. Freddie’s weekly mortgage survey captures activity through Tuesday, so the big bond market moves of this week will likely be reflected in mortgage rates next week.

This may be the sweet spot for borrowers. Lower rates are obviously a boon for the housing market, which has struggled in the face of a supply crunch, rising prices, and outsize demand. But the economy hasn’t slowed enough that people are losing their jobs. Americas are still showing signs that they want to try to become homeowners. Mortgage applications rose 1.6% over the past week as rates drifted down, the Mortgage Bankers Association said Wednesday.

But few of the other obstacles have been resolved. The average mortgage application size hit a fresh high for the third week in a row as the supply of entry-level homes dwindled, the MBA said. The upcoming spring selling season will be watched very closely for clues about how the market is doing.


Opinion: Why out-of-control bubble-era mortgages still threaten to smash major U.S. housing markets

The 2004-07 bubble era in U.S. housing markets was a time of utter madness.  Much has been written about it, but almost nothing has been said about the craziest aspect of it — the cash-out re-financing lunacy.

Let’s take a good look at it and explore why the scope of this insanity was so massive that it could — once again — start to take down numerous major housing markets within the next year.

Although traditional refinancing had been done by homeowners to lock in lower interest rates for their mortgage, what became known as a cash-out refinancing was different.

With home prices soaring nationwide during the housing bubble, homeowners an opportunity to pull some of that growing equity out of their house.  The main vehicle was a refinance of the homeowner’s first mortgage. The owner cashed out the growing equity in the house by refinancing the first mortgage with a larger first. The difference between the two amounts went directly into the pocket of that homeowner. Just like printing money!

How much extra cash are we talking about?  Freddie Mac publishes a quarterly cash-out refinance report.  Between 2004 and 2007, homeowners were able to cash-out a total of $964 billion.  They were free to spend it on anything, and they did.  Freddie Mac’s figures include only refinancing of prime first-lien conventional mortgages. They do not include refinancing of second liens nor refinancing of subprime loans.

The second method was for the owner to refinance a second lien called a home equity line of credit (HELOC).  The HELOC was similar to a business line of credit where the homeowner could draw on the available credit up to the limit provided by the lender. The beauty of this HELOC was that almost all of them required only interest payments for 10 years.  Who could resist? Few did.

Cashing out the refinanced HELOC was similar to the cash-out first lien.  A borrower was offered a line of credit larger than the current HELOC.  The difference was extra money upon which the homeowner could draw.

During the peak bubble years of 2004-06, roughly 20 million first liens were refinanced across the country.  According to the Freddie Mac report, more than 85% of all refinances were cash-outs in 2006.

Los Angeles: the epicenter of the madness

Since California was the center of the housing bubble in the U.S., it also became the epicenter for the cash-out refinancing lunacy.  Between 2000 and 2007, home prices across California almost tripled.  Homeowners used this to turn their rising home value into real spending money.

Roughly five times as many refinance loans were originated in California compared to mortgages for purchasing a home. Millions of Californians refinanced their first mortgage once, twice, even three times during the bubble years. They also refinanced with a cash-out HELOC while their home soared in value.  Homeowners partied as if it would never end.

If California was the epicenter for the cash-out refinancing madness, metropolitan Los Angeles was undoubtedly the epicenter of the California craziness.  Here is why.

The Los Angeles metro is comprised of Los Angeles and Orange counties, with a population of about 13 million during the bubble years. For four years, utter lunacy prevailed.

According to, 2.72 million conventional mortgages were refinanced between 2004 and 2007 in the Los Angeles metro alone.  How much money was involved?  A total of $627 billion in refinanced mortgages was originated.  That’s right – $627 billion for one metro.

While these L.A. numbers are mind-boggling, the average refinanced loan was just $232,000. That puzzled me for some time.  This was California during the craziest real estate bubble in U.S. history.  Eventually I realized that most of these were refinanced HELOCs and not first mortgages.

Since the median California home sale price at the peak was close to $500,000, how many refinanced first liens in Los Angeles metro were jumbo mortgages?  These were mortgages that exceeded the limits for a loan to be guaranteed by Fannie Mae or Freddie Mac. gives us the answer. In 2005 and 2006 alone, 231,000 jumbo mortgages were refinanced in the Los Angeles metro. With an average size of slightly over $600,000, the total came to an astronomical $140 billion — among a population of around 13 million.

The housing collapse in L.A. and its turnaround

By 2008, the housing market collapse in Los Angeles was in full swing.  That year, 37,670 homes in Los Angeles County were foreclosed by mortgage servicers according to data provider Property Radar.  Although foreclosures nationwide did not peak until 2010, the peak for Los Angeles was in 2008.

Prices were cratering throughout California in 2009.  More than 500,000 delinquent homeowners received a default notice that year.  According to the California Association of Realtors, nearly half of all sales were either repossessed properties or short sales.  DataQuick reported that in February 2009, 58% of all home sales in California were repossessed properties.

As home prices showed no sign of leveling off in 2009 or early 2010, lenders and their servicers panicked.  They decided that the bleeding might be stopped if they drastically reduced the number of repossessed properties placed on the active housing market.  RealtyTrac had begun reporting as early as April 2009 that most foreclosed properties were being held off the market. They estimated that roughly 80,000 foreclosed properties in California had been deliberately kept off the market.

What began in California spread nationwide.  This table shows what servicers in major metros were doing with their foreclosed homes according to data provided by RealtyTrac.

By mid-2010, Los Angeles County mortgage servicers had just under 30,000 properties in their foreclosure inventory.  A mere 1,214 were actively for sale.

Did this desperate strategy prevent home prices from falling further? Not at first.  There were simply too many delinquent properties that had not yet been foreclosed.  As late as December 2010, 34% of all homes sold in Los Angeles metro and the other four surrounding counties were repossessions.  Two months later, 40% of all sales in the state were foreclosed properties.  More drastic action was clearly necessary.

The solution was to sharply restrict the number of delinquent properties actually foreclosed.  Early in 2012, the number of homes repossessed by the servicers began to plunge.

Take a look at this table showing the sharp drop.

Because of this massive cutback in repossessions, home prices in Los Angeles County finally began to level off and then turn up.  ATTOM DATA reported that sellers in the second quarter of 2012 actually showed a profit from their original purchase price.

Servicers realized that reducing foreclosures to a trickle had worked. By February 2013, repossessions plunged in LA County to a mere 310. For all of 2013, only 3,340 houses were foreclosed.  What servicers were doing went unreported by the media.

Cash-out refinancing exacerbated the L.A. collapse

There is an excellent source that explores why Los Angeles was so devastated by the housing crash.  Steven Lauffer was a professional staffer at the Federal Reserve Board.  In 2013, he published a paper entitled “Equity Extraction and Mortgage Default.”  Lauffer carefully laid out the case that mortgage defaults in Los Angeles County were caused by cash-out refinancing much more than by anything else.

Using CoreLogic’s search tools and database, Lauffer was able to search more than 1.2 million homes between 2000 and 2009 in Los Angeles County.  Through this, he could identify every open mortgage against all these properties during the study period.  He selected 100,000 homes purchased between 2002 and 2004 before the bubble reached its peak.  From this, he randomly chose 20,000 properties to make his study more manageable.

What Lauffer found was truly shocking.  Half of these homeowners had taken out a second mortgage at the time of purchase.  After buying the property, these owners took out an average of 2.5 new mortgages through 2009.  Of these new mortgages, 45% were cash-out refinances and an additional 10% were HELOCs.

When home prices stopped rising in 2006 and then began to decline, homeowners started defaulting in droves.  Of those who bought a house in 2003, 10% had defaulted by 2009.  Those who purchased in the peak bubble year of 2006 saw their equity evaporate almost overnight.  By the end of 2009, 40% of this cohort had defaulted on their mortgage.

Here is the real shocker: Lauffer found that of those homeowners who defaulted by 2009, 40% of them had purchased their home in 2003 or earlier. Although their houses had increased in value considerably until the bubble popped in late 2006, more than 40% of their outstanding mortgage debt in 2009 was the result of cash-out refinancing – what Lauffer called “equity extraction.”  For 90% of the defaulters, he found that their original mortgage debt at the time of purchase was less than the value of their home when they defaulted.  It was this cash-out refinancing more than losing a job or anything else that led these homeowners to default.

Why difficult times are still ahead of us

In a recent column, I discussed why the massive delinquency of bubble-era non-agency mortgages is a disaster waiting to happen.  Comments by quite a few readers showed me they had a hard time understanding how fewer than 4 million mortgages could take down major housing markets.

That is a fair objection.  You need to understand that the problem is much greater than just the non-agency mortgages.  During the bubble years, a total of 28 million first and second liens were refinanced.  Recall that roughly 80% of these were cash-out refinances.

Although the cash-out refinancing lunacy was most excessive in the Los Angeles metro, it took place throughout the nation, especially in the major metros. When home prices began declining in late 2006 and early 2007, the vast majority of these homeowners had a total mortgage debt which was much greater than when they bought their home.

This massive problem of underwater homeowners could not be resolved only by shutting off the spigot of foreclosures.  That is why a total of 25 million permanent mortgage modifications and other so-called “workout plans” were put in place from 2008 until June 2018 according to data provider Hope Now.

Modifying mortgages as an alternative to foreclosure just kicked the can down the road.  It succeeded in bringing these delinquent homeowners into current status. Yet millions of them are re-defaulting on these modified mortgages. The number of re-defaults is increasing relentlessly around the U.S. Worse yet, many re-defaulters are on their second- or third mortgage modification.

Vulnerable investors

Which investors might be vulnerable?  Owners of some mortgage REITs, owners of nearly any mortgage-backed securities (RMBS) originated by Ginnie Mae (FHA-insured mortgages), and more than a few hedge funds.

It is quite likely that there is no feasible solution to this massive problem of mortgage modification re-defaults.  As home sales weaken now around the country and sale prices level off, you’ll do well to prepare by assuming the worst.

Source: Marketwatch

Saudi Arabia’s Fannie Mae Plans $2.3 Billion in Sukuk Sales

Saudi Arabia’s first mortgage-refinancing firm is set to debut in the bond market with a plan to raise as much as 8.5 billion riyals ($2.3 billion) this year as the kingdom seeks to expand home ownership.

The Saudi Real Estate Refinance Co., the state-run equivalent of Fannie Mae and Freddie Mac in the U.S., will tap domestic and international debt buyers with Islamic bonds, Chief Executive Officer Fabrice Susini said in an interview in Riyadh on Wednesday. The refinance firm aims to fund around 80 percent of its assets with debt or loans, he added.

Saudi Arabia has taken a number of measures to increase home construction and lending as it seeks to overcome one of the world’s lowest mortgage penetration rates. For years, the absence of financing firms like SRC limited the ability of banks to expand their mortgage books amid central-bank limits on loans to any one sector.

The refinancing firm, which started in end of 2017, has been operating for one year. It was started with 5 billion riyals in capital and has been working closely with the government’s Real Estate Development Fund. The fund also provides interest-free loans to middle and low-income citizens through commercial banks.

The SRC plans to sell sukuk domestically in the next two quarters and will tap international investors by the end of the year, the CEO said.

Public Offering

“We may look at a public offering rather than purely private placement,” Susini said. The plan then would be to issue around 1 billion riyals, which “would be a decent size for a first international issuance.”

The refinancing firm expects to buy 7 billion riyals to 10 billion riyals in mortgage portfolios held by banks and mortgage providers this year, Housing Minister Majed Al-Hogail told Bloomberg in an interview in Riyadh on Wednesday. Susini said most of those portfolio purchases will likely come from mortgage finance companies not banks.

“The mortgage finance companies, up until the creation of SRC, were very much dependent on the banks in terms of refinancing,” he said. “As we come with a new offer that is competitive, they will be more incentivized to work with us.”

Source: Bloomberg

US mortgage size hits an all-time high $354,500

Douglas Elliman’s Noble Black on the state of the housing market and Gov. Andrew Cuomo, D-N.Y., advocating for a permanent two percent property tax cap.

Mortgages have reached a record-high of $354,500 on average, showing that high-end buyers are having more success at purchasing a home, according to the Mortgage Bankers Association.

Douglas Elliman’s Noble Black said on FOX Business’ “Varney & Co.” that the average size of mortgages consumers were looking to obtain a home is a good sign for the housing market.

“It shows confidence in the market. Overall the economy is still doing well. People still feel positive about buying,” he said on Thursday

MBA’s data shows seasonally adjusted index of loan applications to purchase a home rose 4.3 percent to 250.8 in the final week of March 8.

Black stated that the monthly mortgage rate is also a sign that the economy continues to gain strength.

“You’re not going to do that unless you’re feeling good about the market,” he said.

Black also discussed New York Democratic Governor Andrew Cuomo’s push for a permanent 2 percent property tax cap, saying, “I think it’s great …. I think taxes were getting out of control in certain markets. New York is not known exactly known for low taxes in general, and I think he’s trying to make it where we’re competitive.”

When asked if the property tax is related to the governor concerns over the SALT cap, Black said, “I think it’s a great response to SALT, I don’t think it’s the cause of SALT. This is actually one thing that he did very well a few years ago, this is a continuation of it.

Source: Fox Business

The Untold Story of the slow growth of the Nigerian Mortgage Sector

Most Nigerians outside the financial system who have interest in the country’s mortgage sector have always heard that the sector’s slow growth find explanation in the inaccessibility and unaffordability of mortgage loans due to high cost of funds reflected in high interest rate, and demand for high equity contribution from borrowers by lenders.

 But there are more to the causes of the slow growth of this sector which are almost always not talked about. Essentially, little or no note is taken of these other contributors to this slow growth among which are the huge stress which mortgage lenders pile on borrowers and the often non-existent partnerships which some of the mortgage lenders deceive home seekers into believing that they have with developers,  giving the borrowers baseless hope and false impression that they are just a few steps away from home ownership.

Part of the statutory functions of primary mortgage banks (PMBs) and mortgage institutions generally, is to provide housing finance or loan to those who need same to build, buy or renovate existing houses. But, in more cases than one, those who apply for loans from these lenders hardly get them and where they do, they are often subjected to harrowing experiences through near-impossible requirements that leave the borrowers stressed out and almost frustrated.

Many have been cajoled by developers into subscribing to their houses through mortgage only to get in and find out that the invitation is a mere cover shielding the stress and pain in accessing   loans for their dream houses. “My experience with one of these lenders is better imagined than expressed”, says Israel Okafor, a staff of an oil company who applied for mortgage loan from one of the PMBs.

Okafor explains that he was “deceived” by the PMB into believing that it was in partnership with a developer who was building over 500 housing units of various house-types at relatively low prices for  mid-low income earners. “The PMB told me that it was also financing and marketing the estate and, at the same time, providing mortgage for prospective buyers. My attraction was not as much in the financing and marketing aspect as it was in the comparatively low interest rate of 17 percent and 10-year loan repayment period which the bank dangled to me”, he said.

According to Okafor, the bank demanded just 20 percent equity contribution from him for any of the housing units that he wanted to buy from the estate selling for between N5million and N8 million per unit, adding that as a demonstration of his readiness to take up the mortgage and buy the house, he made an equity contribution in excess of 30 percent of the cost of the house.

“Over six months down the line, the developer, the mortgage bank and I have been on a Round Robbin, occasionally stopping at the middle of nowhere only to discover that, in all of this, it has been motion without movement. It has been one story after another”, he fumes.

Ayodeji Adediji, is an ex-banker who worked with one of the big names in the industry, but resigned because “I want to do my own thing and see what impact I can make on the economy from this point”.

He also has a similar experience, differing only in the approach adopted by his own lender who, he said, has kept his N5 million which he paid as equity for the house he wants to buy from a developer who is also in another phantom  partnership with the same mortgage bank.

“As I speak to you, my money has been with the mortgage bank since the past eight months; I am told it is in escrow account in which case it is not yielding any interest for me; the developer is very slippery and insincere with delivery date for the estate. Every day, like a fraudulent referee, he shifts the goal post. By the last count, he has shifted the delivery time three times and still counting”, he lamented.

A banker, who does not want his name mentioned also shared his experience, saying he came close to losing his money to developers over unrealistic delivery dates, lamenting that on each occasion, his money was given back to him after he had nurtured and came close to realizing a home ownership dream.

People with these experiences will hardly ever seek mortgage facility, nor will they encourage any of their relations or friends to have same experience and this is a major factor that can slow the growth of the mortgage industry.

Not too long ago, in a move aimed to address the housing problems in Nigeria, some notable  PMBs and real estate developers entered into another strategic partnership aimed to provide housing and mortgage for prospective home buyers. That partnership which, it was hoped, would in 24 months deliver a residential community comprising 554 housing units is yet to make any impact.

This is a worrisome development that may continue to stultify the growth of this all important sector. The setting up of both the Federal Mortgage Bank of Nigeria (FMBN) and the National Housing Fund(NHF) were well intentioned, but their operations have left them mired in mucky waters with poor capital base.

Why are high net-worth individuals turned away for mortgages?

With a portfolio of assets worth many millions of pounds, one may assume that securing credit would be a straightforward task for a high net-worth (HNW) individual. The reality can be quite different.

The unique nature of a HNW’s wealth – their incomes, investments and liquidity – puts this group of peple at a surprisingly high risk of being turned away by conventional lenders. This is certainly true in the mortgage market. What’s more, it is an issue that has become more prevalent over the past decade.

So why are even the wealthiest members of society refused mortgages by banks? And what must HNWs themselves do in order to ensure they are able to access credit when they need it?

Tightening mortgage regulation

One of the most notable trends in the mortgage market over recent years has been the tightening of regulations. It is something that has affected first-time buyers, buy-to-let landlords and HNW individuals alike.

The onset of the global financial crisis in 2008 saw many conventional lenders become more risk averse. Rightly keen to avoid mortgage defaults on a large scale and adopt a more scrupulous approach to deciding whom to lend money to, the methods applied to assessing mortgage applications became stricter and stricter in the years following the economic crash.

At the same time, regulatory changes have also been introduced; in recent years there have been numerous amends to mortgage regulation, including the ‘Mortgage Market Review’ in 2014 and ‘Mortgage Credit Directive’ in 2016, to name two of the more prominent.

The result of the new regulation, coupled with the more conservative approach of the lenders, has been that a greater number of people are turned down when applying for mortgages. That in itself is not necessarily a problem; developments to ensure only suitable candidates are able to access sizeable loans is essential to protect borrowers, lenders and the property market as a whole.

However, for HNW borrowers the aforementioned shift in how mortgage applications are assessed has created new challenges. Specifically, during the increasingly “tick-box” centric methodology of mainstream mortgage providers, wealthy individuals can often fail to meet pre-defined criteria; typically because such an approach does not take into account the complete financial profile of the applicant, but instead requires them to satisfy a very particular formula.

The irregular incomes of HNWs

One of the most common reasons a HNW individual would fail during the mortgage application process with a high-street bank, for example, is that they have an irregular source – or sources – of income. More complicated still, they might not have any income to speak of.

This is not uncommon among HNWs. Indeed, often the wealthier individuals are, the more complicated their finances become, and this can include them having no monthly pay cheque to prove to lenders that they have a set income.

For the rich and the super-rich, their wealth might be inherited, while their income could come from a variety of investments. To make things a little more complicated, their assets could be held inside trusts and other structures. Alternatively, their investments could be spread across numerous territories.

When these various factors are combined, one can understand why mortgage providers who lack the experience of working with HNW clients are often unable to lend to such individuals. That is why specialist lenders, who have in-depth knowledge of this group and are adept at carefully considering a wealthy borrower’s unique personal circumstances, have such a vital role to play, particularly at the very top end of the UK’s property market.

Understanding their motives

Further to the complicated, irregular incomes and financial profiles of HNWs, mortgage providers face another challenge when working with these clients: understanding their motives.

The mortgage a HNW individual requires is rarely to buy a property that will be their sole residence. Moreover, it is often not even going to be their primary residence and they may have no intention of living in it at all.

Bricks and mortar remains one of the most popular investment asset classes among wealthy individuals. But beyond treating a property as an investment, there are many other reasons they might purchase a luxury house or flat; it could be used as a holiday home, for example, or somewhere for a child to live while studying at university. This can prove to be an issue. Indeed, if a HNW is seeking a mortgage for a property that he or she does not intend to live in, some lenders will be hesitant in providing the necessary capital.

At this point, one might ask: why would a HNW individual even need a mortgage in the first place?

The reality is that some HNWs own significant assets but lack access to the upfront capital needed to buy a multi-million-pound property. Others, meanwhile, want or need to maintain their liquidity rather than investing it all into a real estate purchase.

Developing a detailed and holistic picture of the borrower is, therefore, important for lenders and brokers alike when working with HNW clients. Not only must mortgage providers take the time to understand the precise financial profile of the individual, but they must also know their motives for buying the property in question and the individual’s plans for it.

A lack of transparency from the borrower can be an issue, but typically it is a question of approaching a suitable mortgage provider that has experience working with wealthy individuals who are buying properties for any number of reasons.

Brexit not derailing demand for HNW mortgages

Brexit: we cannot escape it, whatever the topic we are discussing. Predictably, the B-word continues to dominate political discourse, and it will do for some time yet.

But will the UK’s withdrawal from the EU – or more pertinently, the uncertainty it causes – impact HNWs looking to invest in the country’s property market?

Signs since the EU referendum suggest that Brexit has not prompted a mass exodus of wealthy buyers away from bricks and mortar investment in the UK. In fact, demand among domestic and foreign buyers for high-end properties has held strong, particularly when it comes to prime central London (PCL).

Figures released by HMRC in January 2019 showed there was a 50% increase in the number of homes sold for over £10 million between the start of 2017 and 2018. Moreover, in that same 12-month period, the number of homes that sold for more than £1 million exceeded 20,000 for the first time. The majority of these are within the PCL market.

Anecdotal evidence would certainly tell you that some HNWs have adopted a “wait and see” mentality, waiting for the Brexit fallout to pass before buying or selling a property. But the HMRC data illustrates that interest and activity remains at healthy levels. Furthermore, the level of demand still present at the top of the London market is supported by predictions from Savills, which has suggested that PCL property prices will grow by 12.4% between 2019 and 2023.

It means that there are still many wealthy domestic and foreign buyers requiring financial products, such as mortgages and remortgages, as they seek to consolidate or expand their property investment portfolios.

In the months ahead, as the Brexit deadline comes and goes, it is important that specialist lenders continue to support HNW property buyers. This will, in turn, enable the prime property market to remain fluid and stride confidently into the post-Brexit world.

Source: Mortgage finance Gazette

Mortgage outlook and funding markets

The mortgage market past and present

To understand where we are going we need to understand where we have been – particularly in the past 10 years or so. The Global Financial Crisis (GFC) had a profound impact on our markets: up to that point, much of the growth in lending had been funded by wholesale funding and securitisation. T

hat stopped dead in its tracks on one day – August 9th 2007

We shrank from well over 100 active lenders to only six lending anything of note. The number of mortgage intermediaries halved and gross mortgage lending fell from £356bn in 2007 to about £134bn in 2010.

Lenders were all focused on survival and maintaining liquidity rather than growing their share of the mortgage market.

More than 10 years on, what does it look like now?  Gross new lending is running at about £65bn a quarter, still some 25% below pre-crisis levels, with annual net lending at £45bn for owner occupied and about £6.5bn for buy-to-let.

We have total outstanding mortgages of £1.4tn, up from £1.2tn at the end of 2007. So, to be clear, the growth in mortgage balances outstanding over that 12 year period is nothing more than the effect of inflation over time.

Lending levels certainly haven’t grown in line with house prices, though the drivers aren’t entirely the same. Following the recession in 2008, average wages fell almost consistently in real terms until mid-2014. From 2014 to 2016, inflation was low and wages increased, though they’re still not back to their pre-recession levels. Now, inflation has caught up again, and real wages are levelling off.

Funding today

An overview of funding tells us that a slew of Bank of England schemes have been provided which have now mostly ceased and are in run-off. There has been a resurgence of retail funding and that has both good and bad aspects.

Looking at wholesale funding, the market had been recovering well and increasing numbers of Residential Mortgage Backed Securities (RMBS) issues had been seen although in truth it has been smaller specialist lenders and acquirers of portfolios in the main. But this all changed in early January. More of that in a moment.

Whilst retail funding and Bank of England schemes have predominated, a return of wholesale funding and RMBS/Covered Bonds is inevitable – although it might not feel like it right now.

Although this return to normality is good and to be expected, it will squeeze margins more as subsidised funding falls away.

Mortgage markets are overcrowded

The majority of mortgage lending in the UK is carried out by relatively few lenders who have streamlined products and processes to both cut costs and to minimise conduct risks, which are now greater after the Financial Conduct Authority’s Mortgage Market Review reforms of October 2014.

This in turn has led to a growth in underserved and niche markets and if you look at products in the mortgage market today and compare it with say 20 years ago, I’d say that there is very little innovation.

But we have too many lenders chasing too little business which has inevitably led to margin compression and credit creep. This is not so good.

To be specific, amazingly we have around 145 lenders today compared with around 100 in 2007. Of these, the top six lenders command more than 70% of all mortgage lending in the UK and if you broaden it to the top 15, they account for around 90% and focus on high income affluent customers. So that means around 130 lenders compete for 10% of the market. About £26bn per annum!

And it doesn’t end there. Latest data from the Bank of England tells us that 17 banks have been authorised in the UK since 2013 and there are more in the pipeline. No wonder credit and price wars have started.

We also have an ageing population with increased outright homeownership and there is now considerable housing wealth concentrated in older homeowners, with those over 55 years having wealth of more than £1.8tn.

As the borrowers pay off their mortgages, they will reduce the stock of loans outstanding, even with some of them taking out lifetime mortgages of one sort or another.

Pricing and risk are still used to get business in the majority of the market – and the big lending players have the balance sheet firepower to achieve this. For smaller lenders, not to understand this could be fatal.

Funding schemes

As we have seen, there has been a range of funding schemes available to banks and building societies which have allowed them to fund mortgages at close to zero marginal rates.

This has stimulated the markets but has meant smaller non-bank players have had to concentrate on market differentiators to compete at all.

Now these schemes are in run-off, this will address the imbalance to some extent and allow smaller lenders to compete on a more level playing field.

The effects of tighter regulation and oversupply in the low risk sectors has been that the number of prime customers is now in decline.

The larger lenders have exacerbated this by industrialising their processes and simplifying products. This means that more can be done on an automated basis to both cut costs and reduce regulatory conduct risk. But it comes at a cost.

With house price growth massively outstripping wages growth, the first-time buyers’ market has fallen sharply.

Coupled with ageing borrowers paying off their mortgage, the mortgage market may well have peaked and is now in long-term decline in my view.

But all is not lost – even though around 130 lenders are fighting over the £26bn of lending per annum not transacted by the top 15 lenders, we are seeing a re-emergence of specialist lenders focussing on gaps in the market – including higher risk borrowers.

A note of caution

Income multiples are higher today than pre-crisis and rising as is the house price/earnings ratio which is close to the all-time high we saw just before the credit crisis.

Although arrears are low and falling – this is to do with the low interest rate environment and little to do with lenders skills in my opinion!

So now to funding

It’s hard to think that until the 1980s the mortgage market was entirely dominated by building societies and retail deposit funded.

Centralised lenders started to appear in the early 1980s and the first UK securitisation was in the mid-1980s – the so-called ‘MINI’ deal.

Now, apart from retail funding, we have securitisation and Covered Bonds (similar) and many other options such as ‘flow deals’ where a lender writes loans and then ‘sells’ them to a funder which could be another lender or a fund such as an asset manager.

We have had peer to peer (P2P) lenders where they source matching funds from individuals and then lend the money to borrowers.

And they are broadening out beyond retail funders to institutional funding to become ‘market place’ lenders. In the case of Zopa, the world’s first P2P lender, it has also become a bank.

What is a lender? A broker? An originator? It’s all blurring and these terms are somewhat interchangeable.

Back to first principles

Warehouses – not a building in this case but a temporary facility which funds mortgages until you have enough to sell them as a portfolio or securitise them.

These are generally a one-year maturity facility and providers are usually banks. Banks like to see a clear ‘exit’, i.e. they don’t want to be left funding a bunch of mortgages for 25 years – they want it to be a temporary funder. When the ‘exit’ isn’t clear, they can become very nervous!

So what happened in January when there were clearly a few problems? We came back from Christmas and then all hell broke loose.

Secure Trust Bank announced it was pulling out of the mortgage market. I believe that was more to do with my earlier comments about too many lenders chasing too little business.

I think Secure Trust  just decided it couldn’t find a profitable, low risk niche that met its requirements so it is out for now. Sensible!

Then Fleet Mortgages announced it was pulling products. My reading of what happened is as follows:

  • Year-end had just closed so investors had squared away their immediate investor needs.
  • Significant geo-political risks remain and not just in the UK. But then we have Brexit.
  • Brexit means uncertainty and if you were an investor who didn’t need to invest just yet with the whole year ahead of you, why wouldn’t you wait until Q1 was out of the way so that at least you could see whether the UK leaves the EU with a deal or not?

You have to remember that there aren’t too many investors operating in the UK RMBS markets compared with pre-crisis days and some of them are just ‘yield tourists’ – chasing deals globally where they see the best returns and risks.

And if you were a bank providing a warehouse and you couldn’t see a clear ‘exit’ you might wish to reign in lending until the picture became a little clearer. Simples!

This should be seen as a short-term issue – it’s happened before and I daresay it will happen again. Worry not!

Securitisation is re-emerging

Securitisation was absent in any meaningful way from 2007 until 2012 – more latterly because major lenders just didn’t need it given the plentiful supply of liquidity from the Bank of England at subsidised rates.

The bad press applied to RMBS was, at least as regards Europe, unfair. The UK has been 80% of this market in Europe and defaults on UK RMBS have been and continue to be close to zero.

Ill-informed coverage around credit and liquidity issues and lazy bundling with the very different US market led to securitisation being dubbed a ‘bad thing’.

To be clear, RMBS provides funding to maturity and is designed to survive major stress scenarios. And it has come through with flying colours.

Retail funding for mortgages – how useful?

There’s nothing wrong with retail funding, but it is not the panacea to all funding problems as some people think given inherent pricing and maturity mismatch.

With new deposit takers on the block such as Goldman Sachs with Marcus, don’t expect retail deposits to be a cheap source of funding.

And if price wars break out then one effect is that deposits move from one account to another with increased velocity. This has the effect to shorten the duration of the funding with any one institution.

Not a good thing when mortgages are long-term assets needing a long-term funding solution.

More competition means costs escalate and less money is available to fund longer-term assets – duration shortens and with the effect that retail funds become a less useful and more costly way of funding going forward.

Diversification of funding is the key! It is essential that we don’t focus on just one form of funding – we need retail and wholesale.

To summarise

The UK mortgage market is challenging and in long-term decline: first-time buyers are falling away given tighter conduct and prudential rules; house prices continue to escalate with supply/demand imbalance outweighing, over time, even short-term Brexit impacts; and wage settlements are not keeping pace with inflation.

Like many countries in the world we have an ageing population – around £1.8tn housing wealth is with the over 55 year olds and they are paying off their mortgages.

The trouble is that many people are asset rich and income poor and this, coupled with the legacy of mortgages with no repayment mechanism is giving rise to a growing need for lending into retirement. Expect to see continuous growth in that market.

We generally have much less product innovation than we did but remember, the UK still ranks No1 in the world for technology innovation in financial services.

Securitisation is making a comeback but there are far fewer investors than there once were.

There are too many lenders, too few borrowers.

The UK may have plateaued in some respects but it is still a very significant market with advanced products, technology and regulation

The UK has major headwinds – at least for now with Brexit.

Expect lending to get tougher – some lenders won’t make it as things stand given we have too many competing for the same business and, if I’m right, the mortgage market has plateaued and is in long-term decline.

There are opportunities but it would be fatal to get caught up in price wars with the mainstream lenders.

Source: MortgageFinanceGazzette

Everything you should know about getting preapproved for a mortgage

Getting a mortgage pre approval can give you a big advantage in the home-buying process, so much so that’s it’s almost standard these days in most areas of the country.

This golden ticket involves some of the same steps as a mortgage application. You provide detailed information on an application about your income, debts and assets. The lender does a hard credit check.

Soon, if you’re approved, you’ll receive a loan estimate telling you the maximum amount you can borrow.  With this estimate, you and your real estate agent will know what price range of homes you can afford.

Here are three reasons to get a mortgage pre approval before house hunting:

1. Get a better idea of what you can afford

You dream of an amazing house in an amazing neighborhood. But don’t waste time and energy looking at houses you can’t afford.

A pre approval can help determine how much you can afford and what a lender would be willing to lend you.

Getting preapproved for a $300,000 loan means you should look for a home that’s less than that.  If you plan on making a 20 percent down payment, then you can look at houses in the $360,000 and below range as a rough starting point.

But there’s more. Take into account your household expenses, and other financial obligations that lenders won’t view on your credit report.  Think about all those thing

s you pay for each month such as groceries and car insurance that factor into how much house you will actually be able to afford.

Lenders generally want no more than 28 percent of your gross monthly income(before taxes, that is) to go to housing expenses, including mortgage payment, property taxes and insurance.

2. Stay competitive with other potential buyers

It’s fun to start looking at homes and imaging your kids playing in the backyard. Boring paperwork is easier to procrastinate and leave for later, says Michael Highfield, professor of finance and chair of real estate finance at Mississippi State University.

“But in this competitive market, any serious buyer should pursue a preapproval from a lender in advance to beginning a home search,” he says.

You’ll be at a huge disadvantage if you find your ideal home and lose out to other buyers who do have that preapproval letter in hand.

3. Have your offers welcomed by agents

Agents pretty much run the real estate search process, and you want the seller agents to be receptive to any offer you make. Patty Da Silva, owner and broker of Green Realty Properties in Davie, Florida, counsels her clients to set aside offers on homes from buyers who don’t have a pre approval letters from their banks.

“You have to have a pre approval, and it must be a real preapproval where the lender has verified not just your credit, but bank statements and tax returns, and I call the lender to verify that,” she says.

What is preapproval versus prequalification?

Prequalification and preapproval are different in important ways and easy to confuse with each other. A mortgage lender might tell you how much you prequalify for if you give a quick overview of your finances. While helpful, prequalification isn’t concrete enough to agents or home sellers these days.

A preapproval, on the other hand, relies on documentation and shows lenders what you qualify for based on your financial history and income.

A preapproval uses your paper trail to determine how much home you can afford. It means you complete a mortgage application and have a hard credit check done to determine your creditworthiness.

When to seek a preapproval

The best time to get preapproved for a home is after you’ve thoroughly reviewed your credit reports and score to make sure they’re in top shape. Preapprovals are typically valid from 60 to 90 days because your credit report could change in that time.

It’s not a bid thing to get preapproved more than once. Before you start looking at houses, consider getting preapproved for a mortgage first.

Getting an idea of how to get your finances in order can be helpful to securing a low interest rate and a home you can afford.

While a hard credit check might dip your credit score a little bit, it’s only temporary. To give yourself peace of mind, get your first preapproval anywhere from six months to a year before you plan to buy a home.

This should give you enough time to clean up your credit report and build a solid down payment.

How to get preapproved for a mortgage

Before you do anything, get all the information organized that the lender will need. Some of the documents to produce for the lender include:

  • Current pay stubs
  • W-2s from the last two years
  • Last two federal income tax returns
  • Bank statements (from all accounts in your name)
  • Credit report
  • Driver’s license or passport

If you are self-employed, it might get a little more complicated. You will need to show some other information that backs the fact you have consistent income to pay a mortgage.

The other documents might be business bank statements, a business license, and company tax returns.

The process of mortgage preapproval

During the application time, lenders will be looking at your credit score, credit history, and debt-to-income ratio – or what percentage of your monthly income goes towards paying your current debts.

Before even talking with a lender, you should first get a copy of your credit report. You need to know if any red flags will pop up when the lender is checking.

Credit reporting agencies (Experian, Equifax, and TransUnion) by law must give you a free copy of your credit report once every 12 months.  You can get all three reports at Look this over carefully for any mistakes.

Lenders use that report not only to determine whether they will give your mortgage pre approval but also what interest rate you will receive.

Lenders will examine the report for credit utilization (try to keep this below 30 percent), if you paid your bills on time and as agreed, and how many types of credit you are juggling in your life.

Steady employment and income also play a big part in your getting pre-approved for a mortgage.

Proving you have steady income and a solid job is important to making sure you will continue to repay the loan.

Acing your mortgage pre approval

When you’re starting out in your home-buying journey, there’s a lot to go over. Here are a few things to keep in mind as you’re planning your purchases.

Shop with different lenders. It’s fine to go through the preapproval process with a few mortgage lenders, as long as it’s within a month’s timespan.

Because each pre approval requires a hard credit check, your score will be impacted. If you obtain your pre approvals around the same time, it will count as one hard inquiry.

Consider the down payment. The more money you can put down, the better your loan terms can be. If you put down less than 20 percent of the home’s purchase price, you’ll have to pay private mortgage insurance, which will add to your monthly payments.

Also check for down payment assistance. Some 87 percent of U.S. homes are eligible for one or more homeownership programs, and the down payment program benefit most frequently received is $10,000, according to Down Payment Resource .

Don’t spend a lot or open new accounts after your pre approval. Whether you’re doing it for the first go-round or you’re hitting the home stretch, it’s important to keep your spending low.

Avoid making any large purchases from when you get preapproved to when you close to keep your debt-to-income ratio consistent.

Continue to pay your bills. Staying up-to-date on your regular bills is important to your payment history. Falling behind could mean a big hit to your credit score.

A preapproval letter is great, but remember you are not locked in to the lender or lenders that gave it to you.  Shop around for the best rate and choose the lender that offers you the best terms.

Keep the status quo on your finances

Just because you got a mortgage pre approval, that doesn’t mean it is clear sailing to the closing. Your lender will recheck things such as your credit, bank statements, income and employment shortly before you close on the house.

Making big purchases, taking out new loans or lines of credit, or even closing accounts can delay closing or derail your loan altogether, says Ralph DiBugnara, president of Home Qualified in New York City.

“Any skeletons you have in your financial closet will be found, so it’s best to be as honest and upfront as you can,” he says.

Source: Bankrate

Things to Avoid When Applying for a Mortgage

Before buying a home, you need to know how much you can actually spend during the entire process: paying for the house, downpayment, legal fees, valuation and any other costs that may arise during the entire process.

Most people will use the mortgage route when they decide to buy a house. It is no secret that the mortgage process is both daunting and stressful thanks to all the paperwork involved, and the time and money spent. You need to be extra patient throughout the approval journey in owning your dream home.

The good news is that, if you provide the lender with all the information they require and respond to their queries in a timely manner, you will reduce the pressure involved with getting a loan.

When you apply for a mortgage, you could be wondering why it is taking so long to be approved. Your paperwork seems fine to you, you feel like you have provided all the information they require. But you still feel like something is off. In reality, you could have sabotaged yourself by doing certain things that you were not aware would impact the process negatively. Below are some mortgage application mistakes that could cripple the entire process.

1. Job Instability

Losing your job or getting a pay cut is beyond your control. Having a major career change could affect your chances of being considered for a loan during the underwriting process. If you are in a position to postpone a job switch, hold it off until you receive the financing, unless you are getting a huge pay rise.

A mortgage lender will look at your employment history before they can give you a loan. They need to know that you are in a position to pay off your debt from having a steady income. Usually, a general rule for the minimum number of years you should have worked to qualify for a mortgage is 2 years. This is not to mean that if you have other sources of income, like entrepreneurship, you will not qualify. That is a conversation that you and your lender should discuss your options freely.


2. Using all Your Savings

You can’t ignore the costs involved when getting a mortgage. Legal fees, valuation, appraisal, registration, are some of the things you need to pay for. This could easily end up leaving you broke with no extra cash in your bank account. Lenders will want to see that you have stored some money to show that you are in a position to repay off the loan. Otherwise, they will regard you as a high-risk borrower and lower your chances of approval. You will also need to budget for more hidden costs when buying a house.

Depending on which financial institution is giving you the loan, the downpayment price will range between 5% and 20%. The higher the downpayment, the less mortgage you pay off.

3. Taking Smaller Loans

You’d never think that a personal or student loan can affect your chances of getting a mortgage to buy your first house. Well, it does. During the prequalification phase, lenders will look at all the debt you have.

If you have any pending loans, make sure you clear them off in good time before you apply for a mortgage. If possible, avoid taking any loans whether big or small. It will just mean that you have more debt that you haven’t cleared.

4. Low Credit Score

Your credit score will determine your risk level as a borrower. To find out your score, there are different companies in Kenya that can provide you with a detailed report. If you’re in the habit of taking loans from mobile lending companies no matter how small, make a point of paying it off before approaching a mortgage lender.

In some cases, you will find errors on the report. People have been accused of taking loans from certain companies when they never did in the first place. In the event that you do realize this, dispute the matter and resolve it as soon as possible. One late payment to a short term loan can play a huge role in getting approval.

5. Impulse Buying

Once your loan is approved, this is not the time to go all out and start buying things to fill up your house. The lender will still monitor how you spend money even before they write you the cheque. Taking on more debt before the money hits your account will affect your chances of getting the mortgage approved. Lenders will ask for your bank statements to check your spending habits. If they see you’re spending money aimlessly, they could deny you the mortgage.

When you think about it, these mistakes that people make prior to applying for a mortgage don’t look like big problems, however, they could be the reason why you don’t achieve your dream of owning a home.


WP Facebook Auto Publish Powered By :
Translate »

You have successfully subscribed to our newsletter

There was an error while trying to send your request. Please try again.

Housing News will use the information you provide on this form to be in touch with you and to provide updates and marketing.