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Busy lender's monthly round-up - August 2015

Welcome to TLT's busy lender's monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.

This month in summary 

Mortgages

  • Mortgage lending in July reaches seven year high
  • Challenger banks driving down mortgage prices

Economic outlook

  • "Decent" growth ahead says Confederation of British Industry
  • House prices in major cities soar

Other news

  • Changes to customer complaints
  • Fraudsters given additional time to pay
  • Tax increase on buy to let investments
  • Scotland - Mortgage arrears deals hit record levels
  • Northern Ireland - High Court decision gives boost to professional negligence claims
  • Northern Ireland - Back to the future: NI house prices return to 2005 levels

Mortgages

Mortgage lending in July reaches seven year high

Mortgage lending for July reached an estimated £22 billion, an increase of 9% from June and up 14% from July 2014, according to data from the Council of Mortgage Lenders (CML).

CML economist Mohammed Jamei commented that the increase "is in line with our expectation that lending would strengthen in the second half following subdued activity earlier in the year." 

He further stated that “We expect lending activity in the rest of the year to be underpinned by improving economic fundamentals, but kept in check as any upward pressure on house prices further stretches affordability for some buyers.” 

Mark Harris, chief executive of mortgage broker SPF Private Clients said the growth in borrowing over the past two months had been partly driven by the removal of any uncertainty in the first half of the year about the election. “With the uncertainty that plagued the housing market out of the way, combined with lenders who are keen to do business, all signs point to a strong second half.” However, he added that, "For many borrowers the main issue is not so much finding a cheap mortgage rate but being able to meet the tighter lending criteria now required by lenders following last year’s mortgage market review."

With August traditionally a busy month for lenders, will demand for further finance continue on this upward trajectory?

Challenger banks driving down mortgage prices

Increased competition from new entrants to the lending market, such as Virgin Money, Metro Bank, Aldermore Bank and Shawbrook Bank are helping to drive mortgage rates down.

Virgin Money's chief executive Jayne-Anne Gadhia commented on the current position, "It is the big banks trying to protect their market share, and therefore reducing their prices. They were slower at the beginning of the year to compete in the mortgage market, but in the last couple of months they have tried to regain market share." Virgin Money is responsible for 3.8% of gross lending and 20.5% of new lending in the market this year.

Shawbrook has also indicated its intention to grow its market share, planning to increase its new lending volumes to more than £2 billion per year by 2017. Shawbrook has already lent £812 million of new loans in the first six months of 2015. 

Chief executive, Tom Wood observed that "Going into the third quarter the lead indicators are trending more positively than we saw three, four, five months ago, and as we look around the table at our lending businesses, they are approaching the second half with a renewed energy and vigour, and we expect to see further positive growth." 

With big banks taking steps to try to reclaim their market share (and pressure from Downing Street to diversify the market), the supply of affordable mortgages may be set to continue despite the withdrawal of some of the cheapest deals on the High Street last month.

Economic outlook

"Decent" growth ahead says Confederation of British Industry 

The CBI expects growth of 2.6% this year and 2.8% next year, up from its June forecast of 2.4% and 2.5%, based on growing productivity leading to wage increases and in turn increased household spending. 

Combined with these factors, the CBI also cites robust investment growth and low levels of inflation as positive indicators of growth for the next financial year.

However, the self styled "voice of business" has warned that the outlook on exports should be treated with caution as the strong pound continues to have a detrimental impact on the UK's competitiveness abroad.

With the continuing turmoil in Greece threatening to subdue Euro zone growth for the foreseeable future and a brighter prospect at home, euro-sceptics in Westminster may see an opportunity to press for a referendum on Europe sooner rather than later.

The CBI also expects interest rates to rise in the first quarter of next year following what it describes as "more hawkish" comments from the Bank of England's rate-setting Monetary Policy Committee.

House prices in major cities soar

Prices in major cities are on track for double digit growth this year as demand continues to outstrip supply. 

House prices across the country's major cities increased by an average of 4.3% in the three months to July, the highest quarterly growth in 11 years. 

There does still seem to be scope for growth with nine of the UK's 20 most populous cities reporting average prices below the 2007 peak. 

Commentators have speculated that the continued increase is a result of low mortgage rates, economic growth and rising earnings driving demand, in circumstances where supply cannot keep pace.

Cambridge saw the most dramatic increase with prices rising by 10.9% year-on-year, followed by Oxford (9.8%) and London (9.4%). Other significant increases took place in Bristol (8.6%) and Southampton (7.1%). 

North of the border, prices in Edinburgh increased by 8% in the last year.  

At the other end of the scale, the three cities that are furthest below their 2007 peaks are Belfast (where prices are 47.6% of what they were eight years ago), Liverpool (87%) and Glasgow (89%).

Other news

Changes to customer complaints

The Financial Conduct Authority (FCA) has introduced new rules aimed at assisting parties to resolve disputes more efficiently.

From 30 June 2016, financial services firms will have a target of three days to resolve complaints informally, an increase from the current one day target. The additional time is intended to make the resolution of disputes first time more likely and lessen the likelihood of the customer taking the complaint further.

Firms will also be required to report all complaints to the FCA, which will publish the data and provide context to them. Currently, firms are only required to report the complaints that take longer than a day to resolve.

In addition, from 25 October 2015, firms will be unable to charge their customers premium rates when they make telephone calls to ask for help or to complain.

Fraudsters given additional time to pay

A couple who lied to lenders about their income and circumstances to obtain loans have been given another eight weeks to pay back their £448,000 fine.

The fraudsters have requested the additional time to enable them to sell two properties with a view to liquifying their assets and paying off the fine.

The pair were convicted in 2013 of falsifying documents over a period of 12 years to fund various property development projects. 

One of the duo, who was also convicted of credit card fraud, was jailed for four years and two months and ordered to pay back £220,000 whilst his partner in crime was ordered to pay back £230,000. The couple face further imprisonment of 33 months if they fail to pay the full sum.

This is frustrating news for lenders seeking to expedite recoveries from fraudsters, as the deadlines in this case have been extended to assist the wrongdoers.

Tax increase on buy to let investments

Changes to the BTL tax rules are due to be phased in and fully implemented by 2020.

The new rules prevent landlords from deducting the interest paid to their lender from their taxable liabilities. 

In effect, tax will be calculated based on turnover rather than profit. The result is that a landlord letting a property that is mortgaged on a relatively high LTV ratio could receive a tax bill that outstrips his or her profits. 

Commentators predict that if mortgage costs are more than between 68% - 75% of the rental income (depending on his rate of tax paid), a BTL investment will become loss-making. 

Landlords letting unencumbered property will not be affected by the change in the rules.

Whilst the full impact of the tax remains to be seen, if implementation goes ahead as planned, there will be a significant impact on the BTL market.

Scotland - Mortgage arrears deals hit record levels

Mortgage lenders are agreeing to help borrowers by suspending or reducing repayments in a record proportion of arrears cases.  

Formal arrangements to suspend or reduce repayments have been applied to 44% of arrears cases.  This is the highest level of forbearance since the Bank of England began keeping records in 2007.  It comes as a result of the intense regulatory pressure exerted on lenders in the aftermath of the financial crisis.  

As part of the arrears process there is now an expectation on lenders to consider borrowers' individual circumstances and create a payment plan which is affordable and prevents their house from being repossessed.  

The number of homes repossessed has continued to fall in the last quarter to the lowest level ever recorded.  CML data shows there were 2,500 properties taken into possession between April and June 2015, down from 3,000 in the previous period and down from 5,400 at the tail end of 2014.  

Notwithstanding their apparent tolerance, the pressure on lenders has eased as the overall number of mortgages arrears cases continues to fall steadily from its highest level of 81,469 in early 2009 to 28,749 in the first quarter of 2015.  

However the anticipated rate increase is likely to test the sector's appetite for repayment plans, with lenders encouraging borrowers to plan ahead, seek advice and discuss any financial difficulties as early as possible.

Northern Ireland – High Court decision gives boost to professional negligence claims

A recent decision by the High Court has provided positive guidance on how Northern Ireland courts will deal with professional negligence claims. The decision should provide further comfort to lenders to pursue valid claims in Northern Ireland.

In a preliminary ruling, the High Court followed the established rules in England and Wales in relation to margin of error and valuation methodology. 

The Court has held that a valuation by Myles Danker Associates (MDA) of a site purchased by Helm Housing Association in March 2007 fell outside the acceptable margin of error and that the methodology for the original valuation was flawed. As the valuation was outside the acceptable margin of error, there was in all likelihood a claim against the valuer.  

To deal with the matter in a proportionate manner, it was agreed between the parties that the court should make a preliminary determination as to whether the valuation fell within the margins of errors proposed by the parties.  

The Court concluded that the valuation was outside the permissible margin which it considered to be + or – 10%, and that MDA made a number of errors in their methodology.

At this stage, the court has only heard from the two expert valuers and Mr Justice Horner stressed that he has not formed definite opinions on the matter. The comments made by the Judge however do suggest that MDA will find it difficult to convince the court that it did not act negligently and if the court determines that it did, damages are likely to be awarded.  

This ruling provides some welcome guidance on how the courts in Northern Ireland can be expected to deal with negligence actions against valuer professionals, including margin of error and valuation methodology. 

Although the claimant in this case is not a lender, it is important to note that many of the principles and authorities developed in England and Wales were applied by the court when reaching its decision and appear to be good law in Northern Ireland. 

Northern Ireland - Back to the future: NI house prices return to 2005 levels

According to the latest statistics produced by the Residential Property Price Index, between spring 2014 and June 2015, the average price of a home in Northern Ireland rose by 6% to £113,245. 

Pundits are encouraged that the Price Index is now 1% higher than the house prices recorded in 2005 and that an estimated 4,600 residential properties were sold during the second quarter of this year.  

However, commentators note that the housing market in Northern Ireland is continuing to make slow progress since the market collapsed in 2007 - an observation compounded by the fact that this is the first time that house prices have matched the 2005 levels since 2011.

The housing market in Northern Ireland remains distinct to the rest of the UK and continues to offer some of the lowest prices.

With prices in England, Wales and Scotland continuing to rise on average, Northern Ireland represents opportunities for investors and lenders alike.

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