A dwindling house market in the UK could stretch the financial situation for some mortgage lenders according to credit ratings agency, Fitch.
Their research has uncovered that the British housing market is set to see the trend of lower prices continue, but they do not expect to see a collapse of house prices.
Director of Fitch’s London-based Financial Institutions Group, Alexander Birry, warned that a weakening housing market could place added pressure on UK mortgage lenders who may see a downgrading of their credit ratings, making it more expensive for them to borrow on the money markets. However, a rebalancing act of the market is likely to offer opportunities to those with the best access to funding.
Birry said, “Rating actions may occur if a lender shows more vulnerability to a weakening housing market than is currently anticipated. In particular, the performance of certain non-conforming residential loans in a more difficult market represents a key uncertainty.”
Banks are set to find it increasingly difficult to offer competitive mortgage rates if they are forced to spend more money on their borrowing, which will in turn worsen the squeeze on credit; but downgrades are not expected across the board from UK lenders.
Alliance and Leicester have announced though, that they are set to stop writing the vast majority of new mortgages after they suffered losses of £150 million as a result of a recent credit crunch. Their shares also suffered with a reported fall of 2.5 per cent to a record low of 479.5 pence.
The lender also revealed that they were to end the offer of 125 per cent mortgages as a result of the falling house prices leaving many borrowers who relied on their house value increasing, facing financial difficulty.
The packages that usually saw a mortgage with a loan to the value of 95 per cent, with a further 30 per cent as a personal loan had been abandoned because “Alliance and Leicester is a prudent and responsible lender, with PlusMortgage successfully targeting high quality applicants” according to their spokesman, Stephen Leonard.
Elsewhere on the continent the weakening Irish housing market has also affected their mortgage lenders as Irish banks are more exposed to real estate than most others in Western Europe. This has made them susceptible to any significant frailties in the sector. Fitch analyst Matthew Taylor warned, “If the Irish economy achieves a soft landing, which we regards as the most likely scenario, then most Irish institutions should be capable of rising to the challenge without the need for rating action. In the case of a more severe contraction in economic growth, a wider range of rating actions on Irish banks may be required.”
In Spain property prices had fallen dramatically after a housing boom in recent years. This has left mortgage lenders especially weak when banks have significantly increased their exposure to real estate. However, Fitch has concluded that they see more pressure falling on some of the savings banks, rather than the larger, more expansive lenders.
