Bowling and its Magic

THE UK MORTGAGE MARKET (MAY 2008) In recent months, much has occurred in the mortgage market and with such a lot of press/media coverage, this summary may be helpful to people who wish to understand and ‘take stock’ of the current situation.

What is happening?

The UK Mortgage Market is presently operating in a manner that it is unlike any other within the past 30 years.

From a position of over-supply this time last year – with intense competition among lenders – both new and traditional – on criteria and on price – we’ve moved to a state of under-supply, tightening criteria, widening lender margins and, consequently, higher prices to the consumer.

Many lenders have even left the market – some large, some small. Others have withdrawn from new lending and are ’sitting on their hands’. Even those with strong balance sheets funded by deposits and savings accounts are restricting their new lending in order not to damage their operations or overrun their funding budgets.

The most obvious consequences of this situation are a shortage of mortgage products, mortgage products being withdrawn at very short notice, mortgage products being re-priced upwards and generally more rigid lending criteria.

Why is this happening?

There are three key reasons for this happening:

Firstly, a lack of liquidity in the money markets – that is money that would have been available for banks to lend to each other. In the past (the distant past!) banks would have used their deposits – money in savings accounts – to fund mortgage and other lending. More recently, however, mortgage lending has increasingly been funded by money markets – borrowing from other banks – or from the sale of ‘packages’ of mortgages (Mortgage Backed Securities or MBS).

Unfortunately, because of the incidence of very high mortgage arrears within MBS packages and, particularly, those used to fund the American ’sub-prime’ mortgage market, banks have had to write off huge sums – billions of dollars or Euro. It is estimated that 20% of lending for a number of years in the USA has been to the ’sub prime’ market (the UK ’sub prime’ market has been better controlled and has accounted for only some 7-8% of overall lending).

Major banks are now in a scramble to have less money market funding for mortgages and other loans and more funding for such lending by deposits – just like the ‘old’ days! And, if a bank has surplus cash e.g. from a mortgage that is being redeemed, it is not going to lend it to another bank that may have financial problems hidden away in its balance sheet. The interest rate at which banks lend to each (LIBOR) is much higher than the Bank of England base rate (3 month LIBOR is, at the time of writing, 5.8% compared to the BOE rate of 5%) and, generally over the last few years, 3 month LIBOR has been running at only 0.15% to 0.25% above the BOE rate.

In short, there is not much cash around to fund new mortgage lending!

The second key problem is, simply, confidence. Lenders fear that, as a result of all of the other problems in the market, house prices will fall and that mortgage loan performance – arrears – will worsen considerably. The consequence of this is the tightening up of lending criteria e.g. the disappearance of 100% mortgages – many lenders are now insisting that potential borrowers have a significant deposit. No lender wants to be the last one left in the market with wide-open lending criteria.

The third issue is that of the lenders’ mortgage processing capacity. Lenders’ administration systems can run into serious problems if too much volume is taken on too quickly and many have taken the decision to ‘cool it’ by adjusting criteria or price (or both). In some cases, lenders are no longer ‘open’ for new business.

Of course, the situation could become a self-fulfilling prophecy – house prices will fall because buyers cannot obtain mortgages to buy property. This possibility is certainly a serious concern.

When will things ‘return to normal’?

The short answer is that nobody knows! Indeed, it is quite possible that we won’t see a return to the sort of market that we had in 2006 and 2007 for many years. Arguably, the market then wasn’t normal either – there were plenty of aggressive new lenders with big aspirations who made the market compete on risky terms with little or no profit margin. Following their departure from the market, the remaining strong lenders are rebuilding a more appropriate approach to risk – taking lending criteria back to where we were several years ago.

The hope in the market is that, perhaps, a year or so after the ‘credit crunch’ started and when all of the banks have gone through a whole new reporting cycle, all of the bad news will be exposed and the write-downs and losses will be history – albeit it, recent history. To date, we are some nine months into the ‘credit crunch’ and, if the history of previous financial crises is a guide, we are more than halfway through the current squeeze.

If the confidence issue can be handled, we may see lenders becoming competitive again and with a return to larger lending appetites and willingness to grow.

Essentially, everything points to a slow and steady recovery; there will still be tough times ahead with the numbers of arrears/repossessions ticking upwards.

The Bank of England has made £50 billion available to banks via a ‘Special Liquidity Scheme’ and this is a deliberate move to free-up liquidity and confidence in the market; this has to be considered positive news.

Are there any reasons to be cheerful?

There are some positives in the current situation – fundamentally – the fact that the UK is not USA!

In the UK, employment is at record high levels (unlike the early 1990’s) providing a high demand for housing. At the same time, there are not enough new homes being built in the UK. The economic law of supply and demand means that the housing market is strongly underpinned and is unlikely to suffer a ‘crash’.

Overall new lending is clearly down but demand remains strong, in particular for ‘buy to let (the rental market is boosted at such times) and for re-mortgaging (rate switching, debt consolidation and capital-raising). The lending for house purchases is quiet and will remain so until confidence returns to the market.

In addition, interest rates are on the decline and some economists have predicted the possibility of BOE rate becoming as low as 3.5% to 4.0% next year.

Whether falls in BOE rate will be followed by falls in mortgage rates is far from certain – with sufficient cuts, the cost of borrowing should become cheaper and, perhaps, encourage more people back into the mortgage and housing market.

Mortgage brokers remain the most favoured route for consumers to obtain mortgages from lenders and the proportion of mortgages arranged by brokers has increased over several years as ’shopping around’ has become more common. Customers need advice more than ever and independent brokers have a key role to play in this regard – in order to obtain the best possible deals for their clients and to protect their client-banks from other brokers or lenders hunting for good quality business.

Call Nigel Osgood on 01628 636360 ext. 257 or email him nigel@afpmortgages.co.uk

www.afpmortgages.co.uk

Your home may be repossessed if you do not keep up repayments on your mortgage

SEO And Pay Per Click Downward Economy Tips

Many marketing managers have found the first half of 2008 has been nerve wrenching. Turn on the television, radio or open a newspaper and you’ll see that consumer confidence is down, inflation is creeping in and overall confidence in the economy is reaching historical lows. It is not your fault the market is in its current condition. How could you have forecasted these figures when you submitted your budget last year? Reaching sales goals that were established in an optimistic economy is probably more obtainable than in a downward economy.

You can not control the macro factors of the economy, but as a professional it’s your job to find ways obtain your committed numbers. Before you start waving the white flag, consider these handy search engine marketing steps you can implement.

Determine Seasonality:

Each company tends to have a unique season. For retail, its Q4 where consumer accounting services is Q1. Tourism peaks in the summer months of Q3. Consider your industry, your company and the brand(s) you are responsible for. What is your busy season? How do you define your busy season? Do you define it by an increase in revenue, an increase in transactions or both?

Many managers are finding awkward meetings with senior management based around decreased financial performance. How can you quantitatively explain a decrease in financial performance year over year, or against your sales plan.

If you can’t justify performance, outside of kindly asking senior management to turn on the television and look at the various news stories about the downward economy, what can you do?

There are various programs that can help you determine seasonality. Unfortunately not all programs will provide current seasonality (including paid services). You may find the closest seasonality trends you can obtain will focus around the previous calendar year (example January 2007 – December 2007).

Applying Seasonality to Pay Per Click:

If you haven’t paid attention to pay per click seasonality trending in the past, now you understand the importance. To further stretch your budget in a downward economy think of the application of your pay per click resources. Why distribute your ad spend in perfect twelfths across the course of a year when you know you have a few months that are particularly busy.

To be better prepared for this busy period consider the length of your sales cycle. Shift resources to strong performing keywords at the beginning of the sales cycle. For example if you find your busy season is October and November and you have a 60 day sales cycle, be prepared to increase your ad spend in August. This means your ads and a revised strategy should be ready no later than mid-July.

Determine Online Trends:

Determining online trending of web traffic is difficult. On the surface this seems like it should be as easy as counting inventory on a supermarket shelf. Senior managers, especially with a finance background tend to have a difficult time with online marketing efforts at times because of a lack of measurement in some areas. These professionals are correct to criticize. Getting industry-wide information that is dependable and updated to the present day is not easy.

Some qualitative measurements can be obtained, but reliable industry-wide quantitative statistics are not always available. This is because search engines do not make this information public and other available tools typically rely on sampling, i.e. the validity can be speculated and the information is not absolute (what senior managers are depending on).

Senior management and the marketing managers are going to need to take a leap of faith in some areas here. Past experiences and instincts will need to be considered along with various trending reports.

Reach Out to an SEO firm:

In a downward economy an SEO firm seems like the last area you would want to reach out to. Spending more money is sometimes the last thing a firm wants to consider when in a downward economy and facing inevitable decreased financial performance. For example, a good Atlanta search engine optimization agency will walk you through a series of exercises. You’ll want to determine your cost to acquire a new customer and spend accordingly. Also, you’ll want to ensure your “call to action” steps are well defined and pages such as “contact us” pages are designed for customer usability.

Optimizing your campaign can help you gain market share during a downward economy. While this might not be as glamorous as meeting and exceeding sales forecasts, this is a long term strategy. If you are able to gain market share while the economy is cold, you will be minimizing your loses during this time and positioning yourself to be in a stronger position when the economy turns around.