U.S. mortgage market provides warning signs for U.K. lendersMortgagePress.comUK mortgage market
While U.K. and U.S. mortgage lenders have been moving
increasingly into each other's markets for the past decade,
cross-border expansion has ramped up significantly in 2006 and
2007. This is in part due to the fact that the U.K. and U.S.
mortgage markets are at opposite ends of the lending market cycle
with respect to interest rates, lending volume growth, house prices
and credit risk. New research from TowerGroup finds that lenders
who are considering cross-border expansion must determine whether
the differences between the two lending cycles will enable them to
balance out mortgage revenues and risk—or whether recent
negative housing market developments in the United States are
poised to hit the United Kingdom in the near future.
In 2006 and early 2007, the U.S. mortgage market experienced a
massive shakeout as gross lending volume plummeted an estimated 18
percent. However, mortgage lending volume in the U.K. has continued
to rise, hitting an all-time high of 380 billion pounds in 2006.
TowerGroup believes that U.K. lending volume has been less cyclical
than U.S. volume because of both interest rate trends and loan
product types (i.e., more shorter-term, variable-rate mortgages
that re-price automatically, causing re-mortgaging to occur more
consistently across interest rate cycles).
"The current state of the U.S. mortgage market is an early
warning sign that U.K. lenders should fine tune their own in-market
strategies as well as carefully evaluate before expanding into the
United States," said Craig Focardi, research director of the
consumer lending practice at TowerGroup and author of the research.
"Because the U.K. and U.S. mortgage markets are in different cycles
for interest rates and credit risks, lenders can potentially
diversify and smooth out mortgage segment revenues and profits by
engaging in cross-border expansion. But they must assess these
benefits in the context of the potential for decline in U.K. house
prices and the rising loan default rates on the horizon."
Highlights of the research include:
• The current interest rate/home price cycle in the U.S.
is working in reverse with rising interest rates—reducing
affordability for new buyers, slowing growth of house prices and
driving up mortgage payments for those with adjusted-rate
mortgages. Uncertainty over growth in future house prices is
further clouding the picture for U.S. lenders and consumers alike,
with many experts saying that a large number of homes on the market
• In contrast, the U.K. housing market looks
brighter—with U.K. house prices rising a strong 10.2 percent
during the fourth quarter of 2006.
• However, even if U.K. house prices and lending growth
continue to rise throughout 2007, U.K. lenders, as well as foreign
lenders contemplating entry into the U.K. mortgage market, should
look to the warnings signs coming from the U.S. This includes
diversifying their lending portfolios, maintaining rigor in the
underwriting processes, regularly assessing portfolio risks, and
updating their collections strategy and information technology
"As more sub-prime lenders fail and equity capital is lost, the
mortgage market will continue to be a drag on the U.S. economy and
stock market, but will not severely threaten it financially," said
Focardi. "TowerGroup believes that the U.S. mortgage market is
resilient and will find market-based solutions to resolve its
problems. U.K. lenders, in turn, need to replace today's irrational
exuberance with rational exuberance, and then likely with sober
reality, given the potential for a decline in U.K. house prices
along with a rise in non-conforming and sub-prime loan default
Focardi added, "The U.K. has an advantage in seeing the effects
of overheated housing and mortgage markets in the U.S. and should
heed the U.S. experience, instead of claiming that 'we're
different, and it can't happen here.'"
The new report by Focardi, titled "Opportunities and Risk in
Cross-Border Expansion Between the U.K. and U.S. Mortgage Markets,"
examines cross-border mortgage lending expansion opportunities,
risks, product innovations and technologies in the United Kingdom
and the United States. It also compares and contrasts recent
developments in mortgage lending volume, house prices, product
innovation, sub-prime loan product risk and loan delinquencies.
For more information, visit www.towergroup.com.