The U.K. nonconforming lending market got smaller last week when the news of two more lenders stepping out of the game hit the European market - Southern Pacific Mortgage Loans (SPML) and Preferred Mortgage Loans (PML), which are both units of Lehman Brothers.
In February, SPML and PML announced they intended to scale back origination in the U.K. and would focus instead on servicing their mortgage portfolios via Capstone (see cover story). However, both groups have now decided to stop new originations starting April 2.
Barclays Capital analysts said that the availability of nonconforming products has shrunk since the first half of 2007, with many specialist lenders withdrawing from this sector or re-pricing these products to very unattractive levels.
"The U.K. nonconforming RMBS sector has borne much of the brunt of the credit/funding fallout, as lenders have substantially tightened lending criteria and re-priced mortgages," Barclays analysts said. "While performance, measured by our three-month-plus arrears index, stabilized and even improved in 2007, we believe that rate rises are likely to feed through to higher arrears over 2008."
With fewer available refinancing opportunities, borrowers could be locked into unfavorable rates that could further exacerbate arrears, Barclays analysts said. This shortage of product has also started to put a squeeze on the prime market.
Large lenders have also re-priced mortgage offerings to reduce applications and some have started to withdraw mortgage products as a result of the increased volumes.
First Direct, the Internet banking arm of HSBC Holdings, announced last week that it would suspend lending for the foreseeable future. The bank said it was closing its business to new customers after being overwhelmed with applications for its home loans following recent price increases by other leading lenders. The lender will still allow existing customers to apply for mortgages and will resume offering mortgages to non-customers as soon as the backlog of applications has been dealt with. In the interim, HSBC will offer new customers a two-year fixed-rate mortgage on similar terms to First Direct's best-buy mortgage.
The Co-operative Bank has also withdrawn some of its mortgage products, particularly its two-year home loans, as a result of the high demand. According to market reports, Halifax, the U.K.'s biggest mortgage lender, might be next in line to announce the closure of its business to new customers. Halifax is a unit of HBOS. It is believed that Halifax is also facing an unprecedented number of new applications for mortgages from homeowners looking for the limited mortgage deals still available in the market.
According to the Financial Services Authority, around 1.4 million U.K. borrowers are likely to face higher mortgage costs in 2008 when their fixed-rate mortgages come to an end.
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