Something that astounds me in the midst of the credit crunch is the changing attitude of lenders. We are seeing reductions in what they are willing to lend on, much greater focus on the industry in which a person works in, and more importantly on the location and type of property that they are willing to lend on.
Reductions in what banks will lend on: Things like property development are all but non-existent, focus on a borrowers industry: this is turning lending into an almost ‘life assurance’ or actuarial based risk assessment, people who work in property will only be offered lower loan to value mortgages (they’ll have to come up with bigger deposits). The location and type of property that you can borrow for is also changing, many banks will only do 80% loans on apartments (and how many first time buyers – on of the main purchasers of apartments- have 20% deposits in their pocket?), and some banks will only lend 50% for an investment property that is not in a city!
Here is an ethos ‘We will lend freely at high margins secured by good collateral’. That is what the latest message coming from many banks, but that message is not theirs, instead it is a borrowed rationale, more importantly it belongs to a man who took the reigns of the Fed at one of the toughest times in modern history Paul Volcker, you can see his address to the Economics Club of New York here (see his speech from 5:50 onwards if you won’t want to watch all of it)
We are happy to see the correction that is occurring in many ways, because as Volcker mentioned – the bright new finance machine has ultimately failed the test of the market, and for that reason [putting aside the pain we’ll feel in the transition] we should -hopefully- come out the other side of this with a better operating system, better regulation and a better understanding of finance.
The trends that will develop in response to this will be more firm regulation, and regulators making international agreements or putting international regulatory responsibilities on financial companies. We will also see an increase in capital holding by lenders and a return to loans coming more from deposits than from wholesale funding. This means that getting a mortgage will no longer be a ‘given’ or the easy task it was in the last few years.
The actual process will speed up as brokers and banks start to use electronic documents (interestingly we needed the credit crunch in order to drive the uptake of many operationally efficient methods) and other tools that cut down on the number of human input hours required to realise a loan, however, bigger deposits coupled with more comprehensive and prudent underwriting may mean that ‘getting approved’ will be an event in itself.