March 2015

Fred Crawley, from Credit Today, on why debt purchasers

need to lay the groundwork now for IFRS9

Chancellor of the Exchequer George Osborne has unveiled

the Budget

David Cameron has revealed he would not serve a third term

should he be re-elected

HML News

Guest blog: Fred Crawley,

Credit Today - IFRS9; lay

the groundwork now to

avoid a last-minute rush

Fred Crawley, Managing Editor of Credit

Today, explains why with a 2018 deadline

IFRS9 may not seem urgent, but could

result in a last-minute panic for mortgage

portfolio owners if they do not lay the

groundwork now.

One theory of time management, attributed to

US President Dwight D. Eisenhower, has it

that “what is important is seldom urgent, and

what is urgent is seldom important”.

You‟d be hard pressed to find an environment

that proves the exception to this rule more

neatly than the world of credit provision as it

goes through Financial Conduct Authority

(FCA) authorisation.

In the face of a regulator that has already

shown its teeth, and which is demanding

considerable administrative feats from firms, it

seems that compliance has become the

perennial hot topic: the task that is both

important and urgent.

Nevertheless, Eisenhower still has a lesson for

the market: companies that overlook important

issues beyond those that are most urgent, do

so very much at their own risk.

For me, the implementation of IFRS9 (and the

changes it will prompt for creditors) falls solidly

into this category of important but not urgent.

IFRS9 – important but not urgent?

Because while it may not seem pressing at the

moment – the change in reporting standards

won‟t come into force until January 2018 – it‟s

certainly important, requiring a massive rethink

on the part of any business that deals with

default risk.

The implementation will require lenders to

assess the probability of default on all

exposures, not just impaired accounts, and

make provisions for loss accordingly. As a

result, there may well be significant increases in

impairment charges across the industry.

Not only this, but businesses will need to be

sitting on a long tail of historic performance data

in order to handle this new approach to

provisioning: the bottom line is that the

groundwork for IFRS9 needs to be laid now.

If you look at things in this way, IFRS9 may be

a more urgent issue than it seems: at the very

least, it is an issue lenders still have a chance

to confront before a sense of urgency develops.

Continued over the page

HML News

What this means for debt purchasers

I‟ve been interested to find out what IFRS9

means for the mortgage business, and also for

other verticals covered by Credit Today, for

example debt purchase. In the case of those in

the business of buying books of debt, the

changes wrought could have a dramatic effect

on portfolio pricing – and yet planning for

IFRS9 has taken a solid back seat to

discussion of FCA compliance, at least in the

discussions I have been a part of.

As such, Credit Today will be working with

HML to broadcast a webinar later this year,

looking at what businesses must do now in

terms of tracking, scorecarding, and data

curation to ensure they aren‟t caught out come

2018. HML has been a good partner to work

with on this project due to the sheer amount of

mortgage data the business is sitting on – with

data for more than one million accounts on file,

covering all sorts of risk profile, it is in a good

position to model outcomes.

Indeed, during the broadcast, we hope to be

able to use some of this information for live

presentation, forecasting what may happen to

impairment charges across a number of

different portfolio types, in a number of

different circumstances, following the

implementation of the new standard.

As well as looking at HML‟s core market in

property, we may also look to extend the

analysis to look at what material impact IFRS9

could have on other sectors, such as motor

finance and debt purchase, as mentioned

above.

It will be interesting to see what findings

emerge in the webinar, but even before the

number crunching one message is clear: this

is an issue that portfolio holders should flag as

important before it becomes urgent.

Disclaimer: The views expressed in this blog are Fred

Crawley's and do not necessarily reflect those of HML

Overview of the MFG

Conference.

The Mortgage Finance Gazette‟s inaugural

conference was held at The Gibson Hall,

Bishopsgate, London on 11th March 2015. HML

sponsored the conference and the lunch and

our commercial director Paul Fryers spoke at

the event.

Originate, securitise, trade and repeat

Paul spoke to delegates about whether we will

see the return of the create and trade model. At

the start of 2014, HML expected several new

lenders to enter the mortgage market as a result

of lower securitisation costs, increasing house

prices and improved economic sentiment.

Indeed, we have seen new challengers to

traditional lending enter the sector, such as

Harrods Bank and Charter Savings Bank and a

consolidation in the position of existing

challengers such as Aldermore and Paragon.

The Council of Mortgage Lenders has said that

gross mortgage lending is set to climb to £222

billion in 2015, up from £206 billion last year.

This is expected to increase further still in 2016

to £240 billion. There appears to be plenty of

opportunity for new lenders to come to the fore,

as well as alternative funding lines. Two

questions can be asked; is the dominance of

big banks about to be shaken up by specialist

and niche lenders and are we set to see a re-

emergence of the originate-securitise-trade

cycle?

Securitisation fell out of favour following the

economic downturn, but when used correctly, it

can increase the supply of credit, in turn

supporting financial recovery.

Continued over the page

HML News

Unlike some deals at the height of the boom,

today‟s securitisation deals are much clearer,

with extensive ongoing loan level reporting. It

is telling that the regulator and the Bank of

England have asserted their confidence in

securitisation, so long as it is deployed in the

right way.

Investors, asset traders and lenders coming to

prominence are in a much stronger position

(thanks to improved confidence and macro-

economics) to originate new loans, securitise

their portfolios and trade - raising funds and

repeating the process. Portfolio trades can be

a robust foundation for asset traders to quickly

scale up, enabling them to expand the

originate-securitise-trade model to maximise

return on investment.

A strong speaker line-up

Below is a brief overview of the key points

from some of the other speakers at the MFG

Conference 2015:

Linda Woodall, director of mortgages and

consumer lending sub-division, Financial

Conduct Authority (FCA)

Mortgage Market Review (MMR):

• Affordability tests are being applied to

existing customers, preventing many from

moving to new deals. The FCA finds this

“disappointing”.

• Interest-only mortgages do have a role to

play, with this product not banned by the

regulator. In 2015, just six per cent of new

mortgages were interest-only, a decline

from 32 per cent in 2007.

Retirement:

• A key test for borrowers is affordability, not

age. The FCA does not prevent lending into

retirement and a common sense approach

is required.

Martin Stewart, director of banks, building

societies and credit unions, Prudential

Regulation Authority (PRA)/Bank of England

New lenders:

• In the first two years since its inception, the

PRA granted 11 new licences. It expects

around 5-6 new banking licences will be

granted each year.

• The thing that stands out new entrants from

the crowd is their focus. They may not have

significant market share, but they offer USPs,

specific products and specific service.

• At present, two non-bank lenders are in the

process of becoming banks. There is

particularly large demand from overseas for

lending and lenders.

Paul Broadhead, head of mortgage policy,

Building Societies Association (BSA)

Retirement:

• The BSA is commencing work in April with

lenders to develop a policy for older-age

lending. Conduct and reputational risk is the

key concern for lenders.

MMR:

• Using MMR rules and affordability tests to

prevent a customer from moving to a

cheaper product is poor practice.

• Appointment delays at larger banks as a

result of the MMR has provided opportunities

for smaller lenders and intermediaries, with

small societies leading the way regarding the

transitional rules for new customers.

Industry Statistics

*Date reflects what the statistic was during that period, rather than

when the statistic was published

FEB‟15 JAN ‟15 DEC ‟14

Consumer Prices Index

0%

0.3%

0.5%

MAR ‟15 FEB ‟15 JAN ‟15

BoE Base Rate 0.5% 0.5% 0.5%

NOV-JAN „14/‟15 OCT-DEC „14 SEP-NOV „14

Unemployment Rate (ONS) 5.7% 5.7% 5.8%

FEB „15 JAN „15 DEC „14

Halifax House Price Index Down 0.3% on JAN Up 2% on DEC Up 0.9% on NOV

Average price Average price Average price

£192,372 £193,130 £188,858

Gross Mortgage Lending (CML) FEB „15 JAN „15 DEC „14

Down 9% on JAN Down 14% on DEC Unchanged on NOV

£13.4 billion £14.3 billion £16.5 billion

Home Repossessions (CML) 2014 JULY-SEP ‟14 APR-JUNE ‟14

21,000 5,000 5,400

Industry Statistics

Consumer Prices Index

The CPI decreased by 0.3% on January to 0%

in February. The main contributions came from

the recreational goods, food and furniture and

furnishings sectors.

BoE Base Rate

The Bank of England kept the base rate at

0.5%, as well as the stock of asset purchases

at £375 billion.

The Monetary Policy Committee once again

voted unanimously to keep the base rate at

0.5%.

Halifax House Price Index

The average price of a home decreased by

0.3% between January and February to

£192,372. Values in February were 8.3%

higher than the same month in 2014.

Housing economist at Halifax Martin

Ellis said: “The firming in price growth

shown by the recent pick-up in the three

month-on-three month comparison

and indications of a modest rise in activity are

likely to be due to a boost to housing demand

as a result of increases in real earnings and

spending power, further recent falls in

mortgage rates and stamp duty changes.

“The supply of both new and secondhand

homes available for sale remains low; another

factor that is likely to be supporting house

prices. Supply remains tight despite

housebuilding in England increasing for the

second consecutive year in 2014 and a recent

rise in the number of properties coming on to

the market.”

Unemployment Rate

The unemployment rate for November to

January stood at 5.7%, representing 1.86

million people.

There were 30.94 million people in work, an

increase of 143,000 on the previous quarter.

Gross Mortgage Lending

Gross mortgage lending stood at £13.4 billion in

February, 9% down on December and also on

the same month in 2014. It is also the lowest

monthly estimate since April 2013.

CML chief economist Bob Pannell

said: “Earlier soft approvals data meant that

weaker February lending has not come as a

surprise. Seasonal factors tend to weigh on

activity at the start of the year, but looking

through these, the underlying picture appears to

be stabilising. We expect lending to improve in

the coming months, as employment and

earnings continue to pick up and the impact of

recent stamp duty reforms start to feed

through."

Home Repossessions

Repossessions declined to 21,000 in 2014,

down 26,000 on 2013 and the lowest number

since 2006, the CML revealed.

Paul Smee, director-general of the

CML, said: “The relatively low rate of

repossession among owner-occupiers - around

1 in 600 mortgages last year - should help to

reassure borrowers that, if they do face

payment difficulties, lenders will work with them

to try to resolve their problems. Repossession is

only ever a last resort.”

Top News Stories

.

George Osborne has

unveiled the Budget 2015.

A brief overview of the Budget includes:

• The Treasury will sell a further £9 billion of

Lloyd's shares and launch a sale of £13

billion of Bradford & Bingley and Northern

Rock mortgage assets

• Unemployment is expected to fall to 5.3%

this year, with the highest number of people

in work recorded

• Osborne stated that a disorderly Greek exit

from the Eurozone could have a serious

impact upon the UK‟s economic recovery

• The banking sector will be asked to

contribute more - the bank levy will be

increased by 0.21 per cent, raising an

additional £900 million a year. Banks will also

no longer be able to offset customer

compensation for products such as PPI

against corporation tax

• In 15 years, the country has the opportunity

to overtake Germany as having the strongest

economy in Europe

• Fuel duty will no longer increase in

September, making it the fifth year the duty

has been frozen

• A new Help to Buy ISA will be launched,

where for every £200 saved for a deposit, the

government will add £50

Mr Osborne opened his speech by

saying: “Five years ago, our economy had

suffered a collapse greater than almost any

country. Today, I can confirm: in the last year

we have grown faster than any other major

advanced economy in the world. Five years

ago, millions of people could not find work.

Today, I can report: more people have jobs in

Britain than ever before.”

John Cridland, director-general for

the Confederation of British Industry,

commented: “Banks play an important role

in financing the economy, so repeated changes

to the bank levy are unhelpful because they

create uncertainty and have a negative impact

investment and lending.

“While it is right that banks should pay their fair

share, banks like any business need

consistency around their tax liabilities.”

Mr Cridland also commented on the new Help

to Buy ISA, stating: “The new housing ISA

offers a boost to first-time buyers looking to

save for a deposit and get on the housing

ladder. However, there is an urgent need to

ramp up the supply of new homes to deliver the

240,000 needed each year.

“The creation of 20 new Housing Zones is a

step in the right direction, but we need to up the

pace of delivery to ensure that house prices

remain in reach for first-time buyers.”

The CML also commented on the Help to Buy

ISA, with Paul Smee agreeing that the supply of

sustainable and affordable housing is required.

According to the CML, the average first-time

buyer deposit stands at £25,200. The lowest

average is in Northern Ireland, with a typical

first-time buyer deposit £14,600. The highest,

meanwhile, is in Greater London at £69,600.

Mr Osborne closed his speech by

stating: “The share of national income taken

up by debt - falling. The deficit down. Growth

up. Jobs up. Living standards on the rise. Britain

on the rise. This is the Budget for Britain. The

comeback country.”

Top News Stories

In response, City AM reported that Robert

Oxley, campaign director of Business

for Britain, said: “Gerry Grimstone rightly

supports an EU referendum, but is wrong to join

in the scaremongering that life outside of the EU

would be disastrous for the UK. Britain inside a

significantly reformed EU, or outside with the

right deal would be in a far better position than if

we stick with the status quo or only pursue timid

reforms.”

David Cameron will not serve

a third term if he was re-

elected.

Speaking to the BBC, the prime minister - who

is currently on his first term - said it would be

better for new talent to take over.

Mr Cameron said: “There definitely comes

a time where a fresh pair of eyes and fresh

leadership would be good, and the

Conservative Party has got some great people

coming up - the Theresa Mays, and the George

Osbornes, and the Boris Johnsons.”

Both Labour and the Liberal Democrats have

suggested Mr Cameron is being presumptuous

by commenting on a third term.

UK unsecured household

debt is set to rise to £10,000.

According to PwC, UK unsecured debt could

reach £10,000 per household by the end of

2016. Last year, unsecured debt climbed by 9%

to, in cash terms, an all-time high of £239

billion.

Inflation has fallen to 0%,

with suggestions that the UK

could enter a period of

deflation.

The British Chambers of Commerce‟s chief

economist David Kern said he did not believe

there would be a long period of deflation and

that the 0% rate will lead to stronger economic

growth as people‟s spending power increases.

The Bank of England had previously noted that

inflation had the potential to dip into negative

territory in spring as a result of falling oil prices.

However, Robert Peston, the BBC‟s economics

editor, said that should stagnated prices

continue for a long period of time, this could

depress the economy, with consumers putting

off big purchases on the basis that they expect

prices to fall further still or continue to remain at

a low cost.

The chairman of Standard

Life has voiced concerns

about the UK leaving the EU.

Speaking at a CityWeek conference, Sir Gerry

Grimstone said the move would be “disastrous

for London and the UK”.

He told delegates that the single market is

imperative for the UK and the country‟s financial

services industry needs to promote the

importance of remaining in the EU.