Britain's mortgage lenders should brace themselves for a double-whammy of funding shortages and rising bad debts next year as conditions in financial markets look set to worsen, the Financial Services Authority warned yesterday.
The FSA warned lenders to prepare for the worst, amid fears of rising customer defaults, frozen wholesale funding markets and a surge in withdrawals of retail deposits that would force some institutions to wind down or sell up.
Clive Briault, head of retail at the FSA, told the Council of Mortgage Lenders that, to ensure their survival, companies would need to get liquidity funding in place even if that meant paying a higher price that reduces profits.
Mr Briault's dire warnings pointed out that at least 1.4 million short-term fixed-rate mortgages to customers who have stretched themselves will end next year. Those customers "will find it difficult (if not impossible) to refinance their mortgage on favourable terms... which may prove too much for many of them to afford". Sub-prime borrowers may not be able to borrow at any price, he added.
With defaults set to rise, Mr Briault announced an urgent probe of lenders' treatment of customers in difficulty. He said that some lenders were taking a uniform hard line on defaults that went against the FSA's requirements.
Wholesale markets such as securitisation are unlikely to return to the easy conditions before August's freeze and lenders need to prepare for not being able to get any funding in the markets, Mr Briault said. He also raised the prospect of a mass withdrawal of retail deposits from some lenders, especially for accounts holding more than the Government's 35,000 limit for compensating customers.
"There is a very real prospect that conditions will worsen further into the next year, in terms of both liquidity and credit risks," Mr Briault said. "Some of you may batten down the hatches and weather the storm, waiting for a return to calmer conditions. Others will have decided that more radical solutions are required." Mr Briault said companies might not have the right management to deal with difficult conditions after years of easy mortgage lending. He warned against institutions buying books of potentially risky mortgages from other lenders when they should be conserving cash.
The speech was a clear attempt to warn explicitly about the dangers faced by mortgage lenders after the FSA was blamed for overlooking pressures building on Northern Rock. Mr Briault admitted that in April he should have emphasised the importance of liquidity, which dried up in August, leaving Northern Rock without funding.
The CML warned last week that the positions of some lenders were precarious and called on the Bank of England to cut interest rates tomorrow.
Mortgage lenders have come under funding pressure as wholesale markets have dried up in the credit crunch. Bradford & Bingley and Alliance & Leicester, which have raised more than half their funding in the capital markets, have been forced to make arrangements with individual banks and investors because they could not secure long-term funding in public markets. Paragon, a buy-to-let lender, has said it may have to do a 280m rights issue to stay in business.
Conditions in money markets continued to tighten yesterday as banks hoarded cash before the end of their financial years. The cost for banks of borrowing euros from each other for three months rose to a seven-year high.
Shares of Alliance & Leicester and Bradford & Bingley fell almost 5 per cent before Mr Briault's speech was released.
Banks reject larger lifeboat for depositors
Britain's banks have questioned the need for an increase in depositor protection and called for an inquiry into the regulatory confusion of the Northern Rock crisis.
The British Bankers' Association said yesterday that the current 35,000 limit of the depositors' protection scheme covered 96 per cent of customers. To add one percentage point would require the limit to be doubled, creating costs for banks with little benefit for customers.
The Treasury has asked for views from interested parties on changing the compensation scheme to make sure there is not another run on a bank. The Bank of England has said the low level of depositor protection and potential delays in repayment were a cause of the panic. Angela Knight, the chief executive of the BBA, said: "We have supplied the facts. On 96 per cent, that covers the vast majority of retail depositors and compares well with other countries."
The BBA said the bigger question resulting from the Northern Rock crisis was how to improve the working of banking regulation.
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