Locals-only lending as the credit crunch hits

Mar 27 2008 by Aled Blake, Western Mail

DEMAND for loans as a result of the credit crunch has forced a leading Welsh building society into restricting its mortgage lending.

The Monmouthshire Building Society is one of a number of building societies to have taken action after being inundated with business.

The mutual is one of five financial institutions that will now lend only to people living in its local area.

Roger Thomas, chairman of Cardiff-based Cooke & Arkwright chartered surveyors, said he was unsurprised that smaller lenders had found themselves having to turn away custom.

“The credit crunch is starting to bite,” he said. “People are going to places such as Monmouthshire because they see those smaller lenders having a smaller chain of command which means they get a quicker decision.

“There is certainly a severe restriction with those lenders most exposed and those that aren’t exposed suddenly become a very attractive proposition.”

A further two building societies, including the UK’s fifth biggest mutual, Chelsea Building Society, will now no longer accept business through intermediaries.

And only last week Bath Building Society and Earl Shilton Building Society both withdrew all their products from the market, except their standard variable deals.

Another seven small lenders have changed their lending criteria during the past two weeks, with most reducing the maximum proportion of a property’s value they will lend on, in some cases to just 60%.

Large mortgage lenders have been raising their rates and tightening their lending criteria for some time now, as they face higher borrowing costs after the wholesale money markets dried up.

Smaller lenders, who fund their mortgage book through deposits, had escaped the crisis relatively unscathed but many are now being forced to introduce restrictions as they struggle to keep up with the volume of business they are receiving.

The situation is the result of the “credit crunch” in the world’s financial markets, sparked by rising defaults in the US sub-prime mortgage sector last summer, after many borrowers were granted mortgages inappropriately.

Shock waves from the sub-prime scandal have since affected the global economy leading, for example, to the problems experienced by the Northern Rock bank.

It has also led to mortgage lenders in the UK tightening up their lending criteria and demanding bigger deposits from first-time borrowers.

But Mr Thomas said the situation did not necessarily mean a slowdown in the housing market. He believes there remains a buoyant level of interest in selling and buying properties.

“There is still a lot of activity out there,” he said. “Prices have risen up to 300% in the last 10 years so if you bought your house five years ago, you are still ahead of where you were, even if there is a 10% adjustment in the price you thought it was last year.”

That view was backed up by Cardiff estate agent Kelvin Francis, of Kelvin Francis & Co. “The situation in the money markets has certainly made a lot of the big lenders nervous,” he said. “But the property market here is not being undermined by it. We are getting a lot of inquiries and a lot of properties are coming onto the market – and we are not short of people viewing either.”

The number of different mortgage deals available has dived by nearly two-thirds since the credit crunch first hit last summer to just over 5,700 at the end of last week, according to financial information group Moneyfacts.co.uk.

The group said yesterday that 2,026 residential and buy-to-let loans had been pulled during the past month alone as lenders responded to the credit crunch.

Denise Harvey, mortgage analyst at Moneyfacts.co.uk, said, “Not only is this withdrawal of products shocking in itself, the speed at which the products are coming off the shelves has also been surprising. In one day we heard from 19 lenders that have made the decision to withdraw products or restrict criteria.”