David Prosser: Don't be alarmed by Northern Rock's move back into risky loans
Outlook: There are only 200 products available to buyers with a 10 per cent deposit, down from 800before the financial crisis struck
Tuesday 01 March 2011
Northern Rock and risky loans – words that will unnerve anyone who remembers the lender's collapse in 2007, the first time Britain had seen a run on a bank in living memory.
But we should not necessarily be spooked by Rock's announcement yesterday that it is to return to the 90 per cent loan-to-value (LTV) market. For one thing, it is a misconception that it was the lender's infamous Together mortgage – a package through which borrowers were able to get loans worth 125 per cent of the value of the property they wanted to buy – that caused its collapse. Default rates on Together did prove to be higher, but it was Rock's aggressive funding model that got it into trouble.
For another, a mortgage market that functions well, which is what we need in Britain if the housing market is ever to return to normality (especially for locked-out first-time buyers), is one that offers a wide range of products priced in the context of risk. In offering these higher LTV loans, Rock will certainly be meeting demand, while also improving its own profitability thanks to higher margins.
Are 90 per cent mortgages inherently more risky than lower LTVs? Not necessarily: the risk of a borrower defaulting on a mortgage depends on their financial circumstances. It is true that there is a higher chance of negative equity on higher LTVs, but that, in itself, does not lead to default.
Rock's challenge, then, will be to make sure it lends only to those borrowers it judges capable of servicing the repayments. This is a challenge that it – like so many other lenders – has fluffed in the past, but in an era of tighter mortgage regulation and closer scrutiny from the watchdogs, one would hope it might do better this time. Any easing of credit conditions in the mortgage market – subject to responsible lending tests – is to be welcomed. To put Rock's initiative in context, there are 200 mortgage products available to buyers with a deposit of only 10 per cent – down from 800 before the financial crisis struck.
Message from Europe to lazy insurers
At first sight, it's another wonderful "Europe gone mad" tale. But as so often turns out to be the case with such stories, there is more to gender-based pricing in insurance than meets the eye.
Assuming the European Court of Justice (ECJ) follows the opinion of the advocate general, as is usually the case, it will today rule that insurers should not be allowed to consider gender when setting insurance premiums. So no more savings for women drivers, for example, who typically pay less for car insurance because statistics show they have fewer accidents.
On the other hand, no more reduced pensions either, with an end to insurers being able to sell smaller annuities to women on the grounds they tend to live longer. It sounds nonsensical. But read properly the opinion given by the advocate general last year and you'll discover this is not a case of putting the ideology of gender neutrality before the practical experience of insurers' claims departments.
Rather, the advocate general effectively accused insurers of pricing cover on the basis of gender because they can't be bothered to use more sophist-icated measures of risk.
Take annuities, for example. It is true that women, on average, tend to live longer than men. Theactuarial tables, however, obscure a string of complicating factors. Many of these are socio-economic or lifestyle-related. A man from a more affluent background with a healthy diet and an active lifestyle has a good chance of beating the odds that suggest an overweight woman who spends her days watching television will outlive him. But with the exception of extreme cases, he'll still get the larger pension.
In truth, many insurers price on the basis of gender because it is convenient for them to do so. But in age where companies know far more than ever before about their customers, there is no longer any excuse for such laziness.
The smartest insurers, by the way, will recognise there is an opportunity here. If they use this ruling as a reason to develop more accurate risk-analysis tools – rather than withdrawing from products in a huff, or just levelling premiums up – there will be gaps in the market to exploit.
Not that this is the end of the matter. Today's ruling will alsocreate a whole slew of new issues. Here's just one example: many insurers take people's occupations into account when pricing cover, but in instances where these occupations are dominated by women – nursing, say – will this still be legal?
Still, let's not fall into the trap of writing this ECJ judgment off as another case of Brussels trying to straighten our bananas. It is simply an attempt to force insurers to think a bit harder about the prices they charge.
Primark feels the consumer chill
A double warning from Primark: trading has slowed markedly in 2011 and the UK is the stand-out territory in Europe for this problem. The factors at play are not difficult to see – the VAT rise, higher clothing prices (as well as inflation), and falling consumer confidence, are combining to make people more reluctant to spend.
That Primark is feeling the squeeze, however, should alarm us. It has until now been resilient to the wider economic environment, not least because it has been able to avoid passing on price increases to consumers. That it is now being dragged down with the rest of the high street does not bode well.
Last week, the CBI said that retail sales had slowed very sharply during February and were set to be flat in March. But if Primark is finding the going so tough, the next few months may be even bleaker than we thought.
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