Moody's report 'gets it wrong'

Moody's Investors Services, the leading credit agency, yesterday sailed into a row with building society experts by warning that heavy competition among mortgage lenders placed societies' credit ratings at risk.

The rating agency claimed that uncertain demand for housing, aggressive margin cuts, cash-back deals and an oversupplied mortgage market meant the future of many building societies was in danger.

But one analyst, who would not be named, condemned Moody's report as "a load of old cobblers", arguing that its analysis reflected a completely different point in the housing market cycle.

Moody's annual building societies report said the sector was poised to halve by mid-1997 as many societies prepared to convert to banks. For those that decided not to abandon mutual status, diversification to offer more services within looser regulatory boundaries was now an option, the report added.

"Diversification need not directly affect a society's fundamental creditworthiness. It is probable, however, that some societies will convince themselves that they need to navigate in riskier waters and in the process their credit outlook may suffer," the report said.

The report added that, unlike the late 1980s, high loan-to-value rates were rarer, while stricter underwriting criteria were being applied. In addition, in the past two or three years societies had made provisions against debts.

Rob Thomas, building society analyst at UBS, the Swiss banking group, said: "It is ironic that the report has come now, when there is a sustained boom in the housing market after several years of problems which, actually, building societies weathered quite well.

"The arguments about over-capacity in the mortgage market are less true now than they were a year ago. As for demand, buying a home is now by far the cheapest housing option for most people.What Moody's also forgets is that building societies' profits have virtually doubled in the past three years."

Another expert said: "If this report were not written by an organisation with the prestige of Moody's it would be laughed out of the water. Some of the points are valid but generally, they've got it wrong on this one."