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Official Report (Hansard)

Session: 2008/2009

Date: 17 June 2009

COMMITTEE FOR 
FINANCE AND PERSONNEL

OFFICIAL REPORT
(Hansard)

Role of Local Mortgage Lenders in the Current Economic Downturn

17 June 2009

 

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson) 
Mr Simon Hamilton (Deputy Chairperson) 
Ms Jennifer McCann 
Mr David McNarry 
Mr Declan O’Loan 
Mr Ian Paisley Jnr 
Ms Dawn Purvis

Witnesses:

Mr Jim McCooe ) Halifax

Mr Ian Laing ) Abbey National

Mr Jay Colville ) Nationwide 
Mr Ian Milligan )

The Chairperson (Mr McLaughlin):

Good afternoon, gentlemen. Our discussion will be guided by the beneficial submissions that you have provided and research papers that we have received. I want to make a point that was raised during the morning session: where acronyms have been used in submissions, it would be helpful if organisations or phrases are referred to in full for the written report and broadcast of the meeting.

Given that we have received your written submissions, which members have had the opportunity to read, there is no need to speak to them. I suggest, therefore, that you make some brief opening comments, after which we will move immediately into discussion.

Mr Jay Colville (Nationwide):

Nationwide welcomes the opportunity for discussion with the Committee. It has been engaged with the University of Ulster in the production of Professor Alastair Adair’s research paper that complements today’s discussion.

Mr Ian Milligan (Nationwide):

I reiterate Jay’s comments. We welcome the opportunity to discuss the matters that are contained in the research paper to which we will refer.

Jim McCooe (Halifax):

Like Jay and Ian, I am glad to be here. It is a good opportunity to meet and discuss the current situation. I represent Lloyds Banking Group, which, in Northern Ireland, operates principally under the Halifax brand.

Ian Laing (Abbey National):

Good afternoon. I represent Abbey National. I am involved in similar conversations with the Treasury in London. I welcome the opportunity to discuss matters in Northern Ireland.

The Chairperson:

Those comments were certainly brief. Thank you, gentlemen.

Mr McNarry:

You are welcome, gentlemen. I want to deal first with Nationwide. I understand that you have recently increased the cost of your most popular deals. Experts to whom I listen predict that some of your colleagues’ institutions are likely to follow suit. Perhaps, they will respond on that issue. How do you explain that increase when experts suggest that if mortgage rates are allowed to rise too quickly, that will create serious inflationary pressures, which we certainly do not need? Can you justify the stance that you have taken?

Mr Colville:

Yes. First of all, Nationwide has the lowest base mortgage rate, which is 2·5%. Therefore, that rate is paid by the majority of our existing customers. We are caught in a pincer movement between the rate that National Savings and Investments offers in the marketplace and the rate of retail funds that we can attract, because, as a building society, 70% of our funds for lending come from the high street. Typically, National Savings and Investment’s rate is 0·5% more than I can offer current members.

We have to go to wholesale markets in order to produce a product. That product has a cost. You will find that the cost of borrowing in the wholesale market is increasing. However, there are ways for the customer to get around that, such as asking for a no-fee condition or by adding the fee to the loan. The highest rate of lending for Nationwide’s highest loan-to-value product is 6·83%. Our situation is slightly different from the banks, because we rely on the high street for 70% of our funding. In December and January, we had net outflows to National Savings, and that hurt.

Mr McNarry:

Information from the Council of Mortgage Lenders (CML) clearly indicates that the market is dictating that everything must come down in price to attract the lender. House prices, land prices and access are coming down, and yet you boys seem to be making it difficult by putting up prices. Allied to that is the dramatic increase in the number of house repossessions. We want to kick-start the whole market, but first we want to kick-start the housing market. We want to reduce the squeeze on first-time buyers by making things easier and more accessible for them. However, the banks and building societies do not seem to by playing their role.

You must be concerned about the level of repossessions. Do you, as representatives for the industry, have any suggestions for legislative changes that could help to address the number of repossessions? Is it the case that homes disposed of by repossession generally fail to reach the normal market price? That seems to hit the people whose homes have been repossessed. You and I might know that a house is worth £200,000, and yet the bank is prepared to flog it for whatever price it can get. Even though I am looking at you, Jay, I am talking to all of you. Can anything be done to ensure that homeowners whose homes are repossessed get some cash back if their property sells for the full market price?

Mr Colville:

The thrust of your question is about the issue of repossession. Since December 2008, Nationwide has taken possession of one house in Northern Ireland. Arrears in our sub-prime buy-to-let arm are double the national average. Our mortgage charter is very generous, and I can submit a paper to the Committee on that.

I do not think that you will see a rise in the number of repossessions in the next 18 months, because we are very responsive to our customers, despite building arrears. I do not think that the repossessions bubble has burst yet, because most people probably have insurance. We give people every opportunity to stay in their homes. Our maximum loan-to-value mortgage is 95%, because we are a prudent and cautious lender.

Your initial question was about why rates are going up. Rates are going up because we want to be prudent lenders. We want to ensure that the margin is there to protect the members of the Nationwide Building Society.

Mr McNarry:

I realise that this is an opportunity for all of you to make commercials, and I appreciate your taking the lead in that. We are not here to demonstrate what Nationwide may be doing better or worse than anybody else.

Mr Colville:

We are currently experiencing second-charge organisations, who touted their business on doorsteps, causing our first charge court action. We have not experienced our customers who are unemployed —

Mr McNarry:

You have not addressed the issue of first-time buyers. The potential first-time buyers that I have talked to — I am sure that my colleagues will have heard the same thing — are scared to hell by encouragement to get onto the property ladder. They are scared because of the issues that I am talking about. They tell me that they are scared because you are making it quite difficult for them.

You say that you are prudent and that you have to look after savers and investors, and I understand that. Can you tell the Committee, in your professional view, whether there is anything that it can do to try to assist first-time buyers and get a better deal for them? That will insure the market for the future, but will also lift it. You can understand that most first-time buyers are cautious; they would be mugs not to be, given what they read in the papers. Thank goodness that most of them are cautious. They are thinking that, if they make a mistake, if their jobs are not secure or if this or that happens — bang, bang, bang. Yet, we need them.

With all due respect — maybe I have missed something, in which case I would love to hear what it is — how can you reduce the squeeze on those first-time buyers, and give them some certainty?

Mr Colville:

Homeownership is a traditional desire in Northern Ireland. The way in which it has been funded over the past five years needs to change. Everything has been provided by the finance house, and the commitment to the property has been limited. The credit crunch means that individuals will need to change their lifestyles by committing an element of their income to savings in order to book their places on the housing ladder. That is a lifestyle change that we are all waiting for either at the kick off, or for savings to be more prominent than buying a new car or having a social —

Mr McNarry:

These people are primarily young people. They did not cause this credit crunch. They have seen their older brothers and sisters enjoy homeownership, and your business encouraged that. They have also seen the disaster that has occurred due to the actions of the big boys. They also see that they are now paying taxes to rescue that business. You are telling me that you want them to change their lifestyle. Are you going to change your lifestyle, or are you comfortable now? Can you take a hit? What on earth kind of message is that to the society that we are trying to grow here — change your lifestyle?

Mr Colville:

I think that it is a real message, which —

Mr McNarry:

Is it only real because you have made a mess of things? It is not their fault.

Mr Colville:

With respect, I do not think that Nationwide has made a mess. I do not think that you will see us in any —

Mr McNarry:

I understand your defence of Nationwide. I appreciate that.

Mr Colville:

I accept that the industry has made a mess, and I am sure we will talk about that. However, fundamentally, there is a limit to the growth of a property. There has to be commitment from individuals to —

Mr McNarry:

OK. I am not going to dwell on that. Why did nobody tell the developers that there was a limit to the growth when they were paying exorbitant sums for land? Why did nobody say that that could not go on? Why did that not happen? Was it because nobody stopped to think; or was it because, at least on paper, you were making megabucks, and so you continued to lend? You continued to do it right up until the market crashed.

Mr Colville:

If one looks at the number of housing starts from 2006 until now, the smart developers stopped cutting ground and stopped increasing the supply of houses around mid-July 2006. I am glad that they did. I think that there is a lack of demand for new houses in Northern Ireland because people are waiting for a big adjustment. First-time buyers have probably adjusted, but, considering the housing stock as a whole, people still view their houses to be worth perhaps £80,000 or £100,000 more than their current value. That readjustment has to take place.

In addition, if interest rates increase, customers will rush like lemmings to take funding. We predict that we are perhaps six or eight months away from that situation.

Mr McNarry:

It is very important that we get it right. You said that people need to change their lifestyles. Can you give us a script? Can you tell us how people can change their lifestyles so that they fit in? They obviously have to fit in to what you want. What is the building societies’ recipe or menu for a change of lifestyle for Northern Ireland in 2009?

Mr Colville:

We want people to save regularly to build up a stake. As is the traditional role of a building society, we will then match that stake.

Mr McNarry:

That is brilliant. That sounds as if it will make the world change, but I appreciate it nevertheless.

Ms J McCann:

Thank you very much for coming. David raised the issue of house repossessions. You quoted a very low figure for repossessions that have occurred, but cases of home repossessions in the North have risen by 64%. It is not just about the person losing his or her home eventually; it is also about the threat of losing it. That threat hangs over the whole family. Sometimes the cases for repossession are as important as the end result. Do you feel that the financial institutions and the banks are doing enough to help people who find themselves in arrears due to the recession? Are they being proactive enough?

My second question concerns some of the Government-backed funding schemes that have been introduced for small and medium-sized businesses. A recent survey from the Institute of Directors stated that businesses found new loans difficult to access and that there was a very low take-up of some of the Government-backed schemes. Small and medium-sized businesses informed the Institute of Directors that banks were not being very proactive about informing businesses about the available schemes. There is a lack of awareness about those schemes.

Small and medium-sized businesses also find it difficult to get overdraft facilities from the banks. My concern is whether banks and financial institutions are being proactive enough in helping families who find it difficult to repay their mortgages. The financial institutions should do more to help small and medium-sized businesses to access the loans and the overdrafts that they need, and they need be proactive and let them know what Government-backed schemes are available.

Mr McCooe:

In answer to the first question, the Council of Mortgage Lenders’ written submission is a matter of record. From our perspective, the Halifax and Lloyds Banking Group are doing all that they can to help people who find themselves in difficulty, and they are sympathetic to those people. In relation to the Government schemes, we are fully signed up to the Government’s request that we should not take the repossession route for at least six months, and we are fully signed up to income support for mortgage interest.

On the issue of arrears and possessions, which are dealt with on a case-by-case basis — Jay Colville talked about their incidence for the Nationwide. First, we want the borrower to talk to us as early as possible. Secondly, we regard repossessing a house as an absolute last resort. We do not want to go there. We would much prefer to avoid that. In that regard, we want borrowers to talk to us as early as possible, and we want to help to see them and their families through that process.

The Chairperson:

The Council of Mortgage Lenders was unable to provide the Committee with disaggregated data for the North, but that is exactly the type of information that it needs. Can your institution fill that information gap for the Committee? I expect that such information is not available today, but will it be provided later?

Mr Laing:

We can certainly fill the gap for our institutions. What the Committee will find is that there is a big gap between the repossessions by the larger banks and building societies and the total repossessions in the market.

This crisis has been characterised by an injection of wholesale funds that has gone away, and it has impacted institutions, mostly new entrants to the market, that have relied on those wholesale funds in order to lend. Quite often, specialist lending and sometimes second-charge or buy-to-let institutions have disappeared.

The big banks that are represented here today — typically, Nationwide — hold two thirds of the stock of mortgages, 100% of the lending that is still happening, but less than one third of the repossessions. We all run with arrears rates that are below the CML’s average.

The Chairperson:

You will appreciate that the Committee’s having that information would be of some assistance, even to yourselves, because you are taking the hit for the entire financial sector.

Mr Colville:

The Department for Social Development (DSD) does not have a facility to measure the number of possession writs in Northern Ireland. The information that Ms McCann read to me is the start of the process. DSD does not report the end of the process, which is the number of repossessions.

Ms J McCann:

I reiterate that those statistics came from housing rights organisations that deal with people every day. Even in our constituency offices, we see people who live with the fear of losing their homes. I accept that sometimes people wait until the problem enters the court system, but they tell us that they put off going to some financial institutions or banks because they do not believe that they will receive help or support there. I have accompanied some people and have seen for myself that they are advised on how to manage their budget, as opposed to how to get out of their crisis. That was why I asked the question.

Mr McCooe:

I will answer the second part of Ms McCann’s question, so that I do not appear to be avoiding it. I actually do not have a great deal of exposure to the small to medium-sized enterprises (SME) sector. The Halifax is predominantly a retail bank in Northern Ireland. It does not lend very much in the SME sector. Therefore, I am not in a position in comment on that. I just did not want Ms McCann to think that I was ignoring the second part of her question.

Mr Laing:

On the matter of Chairperson’s question about the number of repossessions, I am happy to provide that information.

The Chairperson:

Excellent, that would be helpful. Do any of the witnesses want to comment on the second part of Ms McCann’s question?

Mr Laing:

I cannot comment on the questions about SMEs, but I can help with the questions that David raised earlier. The statement that everything in the market is coming down is not quite true. Swap rates, which are the wholesale equivalent of fixed rates, have gone up by several tens of basis points in recent months, even while the current prices have been coming down. In the marketplace, two-year or three-year fixed prices have gone up and tracker prices have tended to come down. There are different rates in the market, and that dictates the prices.

Mr McNarry:

I accept that, and that is the point that I am making. Your handling and management costs are rising, but the price of bricks and mortar is not rising. Developers are cutting prices. Everyone is doing their best to hold the market together, and there is a lot of pain involved in that. What is your contribution to sharing the pain? You are putting your prices up.

Mr Laing:

The best mortgage rates are around 3·5%. That is much lower than in previous years, as is the case with the price of deposits, which is between 3·5% and 4%. The market is functioning and rates are low partly because base rates brought them lower. At the moment —

Mr McNarry:

Why are you not lending anymore?

Mr Laing:

We are lending.

Mr McNarry:

You are not lending anywhere near as much as you used to. If everything is coming down and the market is open for that, why are you not lending more and attracting more business?

Mr Laing:

We would love to lend more. Staff in Northern Ireland are desperate to hit their targets for lending. We are trying to take as much business as we can get.

Mr Paisley Jnr:

It is not your interest rates that my colleague is criticising; it is the price that you charge to the customer either at the beginning of the lending period or throughout its entirety that most attracted our attention. I might return to that point when I ask my questions, but I wanted to raise it now in case there was any confusion.

Mr McNarry:

I am glad that we are alert on this side of the Table. Thank you.

Mr Laing:

There are margins on mortgages. If a AA-rated bank — a very well credit-rated bank — were to try to raise funds in the current market, it would pay around 2·5% over the London interbank offered rate (LIBOR), which is between 1% and 2% above the base rate. The cost of funds to the most credit-worthy banks in the country is between 4·5% and 5%, yet we are lending at rates of around 4%, which includes the cost of fees.

Our bank is able to do that because, to varying degrees, we established funding lines before the crisis started that allow us to offer cheaper mortgages than the incremental funding that is available. However, the prices in the market are dictated by the availability of funds. The challenge of the crisis is that funds have vanished at an incredible rate and every institution has reacted to try to protect its business model so that it can continue to provide a sustainable service to its community.

Mr Paisley Jnr:

Your bank charges the customer thousands of pounds to do that, whereas other lending institutions and banks do not charge at that level.

Mr Laing:

Our prices in most markets are among the most competitive.

Mr Paisley Jnr:

The anecdotal evidence from our constituents suggests that building societies have the highest upfront charges; it almost appears that that is done to put customers off.

Mr Laing:

Abbey National is no longer a building society; it is a bank. Building societies are very competitive with us. Because high street banks are so visible, they tend to have quite similar prices.

Mr Paisley Jnr:

I am not arguing with you, but why does that perception exist? Perhaps the issue is one of perception rather than reality.

Mr Laing:

We have all been used to base rates being a very good guide to the cost of money in the markets, the amount of return on savings and the amount that is to be paid on a mortgage. That is true when funding and liquidity are freely available, but we have all been caught out by the fact that funding is no longer freely available. Therefore, base rates are no longer a good indication of the money that will be earned from a bank account or the price that will need to be paid to borrow.

The Chairperson:

Will you comment on the trend towards lending based on LIBOR as opposed to base rate lending? That is a definable trend that has already been referred to this afternoon.

Mr McCooe:

We have always lent on the basis of LIBOR. In the 10 years up to August 2007, the difference between LIBOR and the Bank of England base rate was 0·16%. Therefore, it is normal for people to see those rates as almost being aligned. When the credit crunch hit after August 2007, the gap rose to 0·57%. Today the rate is 0·76%, which is why it has come more into focus. However, for 10 years up to August 2007 when the credit crunch kicked in, the figures were virtually aligned, with only a 0·16% differential. That is the reason that that issue is coming to the fore.

The Chairperson:

That explains it. If we were to have a comparative graph, it would show a shift of business towards LIBOR as opposed to base rate lending.

Mr Colville:

We did not use LIBOR significantly until last month. We have been using retail funding to fund our mortgages, but we are not immune. Our funding source is being chopped away by national savings.

Ms J McCann:

I asked you to comment on the reported significant increase in the cost of overdraft facilities for businesses, which was highlighted in a survey carried out by the Institute of Directors. Local advice organisations are telling us that that cost has also increased for ordinary consumers.

Mr McCooe:

I misunderstood you; I thought that you meant overdrafts for SMEs.

Ms J McCann:

I did, but I was also talking about ordinary consumers.

Mr McCooe:

Would you mind repeating the point?

Ms J McCann:

We have been told that the cost of overdraft facilities has increased in the SME sector and for private customers. Will you comment on that? Given that we are in a recession and people are dependent on overdraft facilities just to get through the month, such an increase is not really a good decision.

Mr Colville:

We are awaiting an OFT ruling on bank charges, so until its decision is announced —

Ms J McCann:

What does OFT mean?

Mr Colville:

The OFT is the Office of Fair Trading. There has been a widely publicised court case involving all banks to determine the charging level for overdrafts.

Mr Paisley Jnr:

Am I right to assume that you are contesting that?

Mr Colville:

Yes, we are contesting it. Our personal banking charges have not changed. We do not offer any commercial lending, and that includes SMEs.

Ms J McCann:

I am talking generally about all banks and financial institutions; I am not directing my comments at one particular bank.

Mr Laing:

I cannot comment on the SME side because it is not my area. However, on the personal side, our overdraft facilities and overdraft balances have been increasing steadily over the past few months, but our pricing has not changed. The interest rates and fees are flat, which partly reflects the current engagement with the Office of Fair Trading as that is an issue that is hanging over the overdraft business.

Mr O’Loan:

I apologise that I had to leave earlier and did not hear all that David was saying, so there may be some overlap in my first question. I am not asking you to repeat yourself, but it would be helpful if you have anything useful to add. With the benefit of hindsight, we can see that there was a huge bubble in land and house prices. Given that your organisations were involved in mortgage lending, it is right to say that your industry contributed to that bubble. Lending products were provided in a way that can now be seen to have been irresponsible. What lessons do you take out of that regarding self-regulation of the industry and the need for more intense Government regulation?

Mr Laing:

Over the past two years, loan-to-value (LTV) limits on most available mortgages have come down. In the past few months, those limits have been relaxed a bit. That is a good example of how banks are engaging in sensible and prudent practices. When house prices rise rapidly, higher LTV limits make sense. When house prices either fall or are less certain, lower LTV limits make sense. We followed that cycle.

Cheap, risk-insensitive funding created a serious bubble in the industry by attracting a lot of new entrants to the market. Several significant bidders in the market extended their risk criteria beyond that which was sustainable, thereby creating the bubble that we are now trying to clear up.

The more prudent firms have come out of that cycle better than others, because they tended to lend against assets. Surveyors have become a key control in the management of the price at which banks will lend against and that which the borrower will end up paying. The process of surveying recently built houses, in particular, has become tighter and much more disciplined over the past two years. We already know the importance of that process.

The broad sweep of what has happened in the major banks and building societies has been a reaction to what has happened in the market. Bubbles happen in the property market; they have happened before, and I am sure that they will happen again. Banks have to be prudent and sensible about the way in which they behave before and after them; that is what we are trying to do.

Mr McNarry raised a point earlier about the issue of repossessions. One of our obligations and duties is to secure a full market value for the repossessed houses that we sell. Approximately 97% or 98% of the repossessed houses that the Abbey National sells are sold on the open market, not through auctions. In each case, we must demonstrate that we have realised a full market value. That is part of the process; if we failed to do that, we would be cutting off our nose to spite our face.

The cycle of the past two years has been unfortunate. We have tried to be prudent throughout that cycle. Our results speak to the efforts that we have made; however, we cannot control the whole market.

Mr Colville:

Consider these housing stats: in 2005, 10,500 new houses were completed; at the end of 2007, 8,000 were completed; and in 2008, 2,700 were completed. Therefore, developers were starting to slow down construction at the end of 2005. Those houses were purchased by investors, so the spike that we were caught in was driven by the buy-to-let market.

Mr O’Loan:

You said that the banks are now, with the benefit of hindsight, being prudent and sensible. However, you referred to the fact that a bubble will be created again, and that does not fill me with confidence. Therefore, there needs to be a level of external regulation, although that will not be easy to manage. We cannot depend fully on the industry to spot the warning signs and decide rationally what action is prudent and sensible at any moment — that is expecting too much.

Mr Colville:

All banks have individual lending underwriting requirements, depending on what portion of the market share they want. The Nationwide’s lending requirements have not changed and its prudent rules for residential mortgages have not changed.

The Chairperson:

Was the bubble inflated by incentive funds for performance that depended on the amount of market share that bankers could win for their company? Is that the greed that people refer to when they say that bankers and financial institutions made a mess of it? Prudence went out the window.

Mr McCooe:

I do not think so, and I do not think that some of those points are fair. Some financial institutions lent mortgages at 100% or more and, in hindsight, that does not look wise. We are not in that business now, nor were we beforehand.

To return to your question, Mr Chairperson, it is absolutely true that colleagues are incentivised for performance. Those are colleagues who earn between £15,000 and £20,000 per annum. It would be wrong to categorise them with the banker who earns a £1 million bonus; those situations are totally different. We do not hide the fact that our colleagues are incentivised on performance. I reiterate that we are dealing with the lower end of salary levels.

The Chairperson:

Yes; however, someone who is at the level at which they get the type of massive bonus that has grabbed headlines, such as a senior director, will certainly ensure that the people who operate further down the food chain deliver in order to create the circumstances in which such bonuses are won.

Mr Laing:

You talked about regulation. We are in the middle of a crisis in which house prices here have fallen farther and quicker than in any previous crunch in the UK, yet repossessions and arrears rates are well below the peaks that they hit during the 1990s and the major banks run with arrears rates that are roughly half of industry benchmarks. There is evidence of prudence in lending criteria; those criteria have been set for good times and bad.

The duties of people who are incentivised to make sales — that is, front line staff who sell products — and those who underwrite and control lending positions must also be separated. Therefore, although staff in the sales part of an organisation might be paid for the amount of business that they write, underwriters and credit-control officers are not. Their roles are separate. The purpose of credit control is to oversee the quality of what is written.

The Chairperson:

The issue of secondary lenders has been mentioned. The circumstances in which people had taken out mortgages and loans drove them into the arms of secondary lenders. Therefore, I do not believe that it is viable for the sector to say that it deals with a certain percentage of repossessions that is, in fact, quite small, when the people who drive the repossession spike are secondary lenders. It is also relevant to ask who created the market for secondary lenders.

Mr Laing:

As part of its mortgage review, the Financial Services Authority (FSA) mooted changes to the regulation of mortgage distribution and, in particular, the behaviour of independent financial advisers. That has some merit. The FSA’s ideas might help to address the skews to incentives that have created a market for specialist and non-standard lending.

Mr O’Loan:

The Council of Mortgage Lenders has informed us that it will soon give evidence to the Commission on the Future for Housing in Northern Ireland, which was launched recently and is chaired by Lord Richard Best. That commission will look at issues associated with the delivery of housing in Northern Ireland. The CML has said that it will give evidence on a strategic direction for housing and a road map for the way forward. Eventually, you will probably give evidence to that commission. At this stage, can you suggest any pointers or markers for a stable and sustainable future for social housing or affordable housing, or for the housing market in general?

Mr Colville:

I can speak as chairman of the CML Northern Ireland. In this instance, therefore, I do not speak for Nationwide. We were involved in the production of Professor Alastair Adair’s research paper entitled ‘Facing the Challenges in the Northern Ireland Housing Market’, of which members may be aware. That brought together solicitors, valuers, the Royal Institution of Chartered Surveyors, estate agents, developers, landlords, and we in the finance sector. There have been two or three plenary discussions that have helped to enhance our understanding of the housing market.

We support the commission 100%; it is a good starting point for the action that you suggest. We will, of course, help and take part in the work of the commission. One of the advantages that has come out of those discussions is a new understanding. For example, a developer understood why I instructed a valuer in a certain way, which was not because the valuer did not like the developer, it was because of our prudence in lending. That was a good lesson for the developer and for us. It reduced the level of mistrust. We want to lend, but we must think about the loan-to-value risk.

Mr O’Loan:

So you are saying that improving the channels of communication is a significant step; it seems a small thing.

Mr Colville:

Yes, it does. We are at the start of a journey; I do not feel that I can say any more at this point. The paper highlights the challenges associated with the supply and demand of the housing wants and needs of the Northern Ireland public.

Mr O’Loan:

I realise that it was an early stage at which to ask that question, but I wanted to know whether you had anything significant to say on the matter.

Mr Paisley Jnr:

I wish to place on record our thanks for your coming here to give your views. They are valuable to us, although they may be painful to hear. You might think that this is a “them and us” situation. We are all in this together, and we must try to work out a way forward. We have to try to get hope for our constituents. At the moment, there is a lot of despair.

May I return to the earlier question on bonuses? I hope you do not think it vulgar of me to ask, but are you gentlemen paid bonuses?

Mr Colville:

Yes.

Mr Milligan:

Yes.

Mr McCooe:

My bonus is deferred.

Mr Paisley Jnr:

I do not ask the size of your bonuses; I will spare your blushes.

Mr McCooe:

I am being serious; I was not jesting. As an employee of the Lloyd’s Banking Group, I am paid a long-term bonus deferred over a number of years.

Mr Paisley Jnr:

My other question is on the issue that hurts and hits the most; namely, repossessions. I would like some clarity on that. That is the instance in which constituents comes knocking on our doors in desperation. Jay has quantified it by saying that there has been one repossession by his organisation in the last 12 months. Can the other representatives quantify the number of repossessions for us as accurately as Jay has done?

Mr McCooe:

I cannot provide figures for Northern Ireland; I do not have disaggregated figures.

Mr Paisley Jnr:

You must be able to give us a guesstimate.

The Chairperson:

I have asked that they write to us with those figures. I prefer that they give us accurate information. I am sure that the witnesses realise how relevant Ian’s question is.

Mr McCooe:

I absolutely accept the point, but I have not brought with me disaggregated figures for Northern Ireland. I have committed to providing the Committee with those. Our experience is that our current arrears and possessions are approximately half of the CML’s UK industry average.

Mr Paisley Jnr:

For the layman, what does that mean?

Mr McCooe:

It is set out in the CML’s written submission. Equally, the CML does not have disaggregated figures for Northern Ireland. I will come back on that one.

Mr Laing:

The Abbey National brand has made 37 repossessions. I do not know the precise figures for the Alliance and Leicester brand, but it is less than seven.

Mr Paisley Jnr:

So there have been 37 repossessions in the last 12 months?

Mr Laing:

No; there have been 37 repossessions since January 2008 and less than seven for the Alliance and Leicester.

Mr Paisley Jnr:

It helps to know that. It is important that we have a grasp of the numbers of people affected. It is a real human problem that MLAs come up against too frequently.

I must also ask about banking charges. All the evidence that we have points to the fact that, at a time when charges should be going down to encourage business, attract more customers to your doors and encourage the wheels to turn again, your charges are not coming down. To put it bluntly, your charges are going up. Why is that? If that is just my perception, please explain why I have that perception. I think that it is the reality. Why do you think that the public come to us and complain that the lending authorities are squeezing them until the pips squeak? They tell us that they want loans and have tried to get them but they cannot afford the charges.

Mr McCooe:

Although we have larger and smaller fees, our average upfront fee is £995. It would be wrong and unfair to view that in isolation. When we are pricing a deal, which is effectively what we are doing, the fee and the interest rate are all part of that package. That is done in a very upfront way: it is clear on the summary box for the customer; it is on their key facts illustration; and it is part of the deal. Without it, the interest rate cannot be what it is. We have a range of products with a range of fees and charges, so there is customer choice. It would be incorrect to see that in isolation; it is part of the overall package.

I looked at our mortgage book before coming to see the Committee today, particularly the information on Northern Ireland. The vast majority of our borrowers are on either a fixed rate or tracker mortgage. A very small percentage of people are on a standard variable rate. It is the package that those customers are buying that we must consider, not just the fee for a mortgage. We are very open about that. The other issue is that these guys, sitting to my right and to my left, as well as the competitors who are not in the room, are competing for that business. Therefore, we have got to be competitive to get that business.

Mr Paisley Jnr:

Is the accusation that the charges are imposed to bail out previous bad lending provisions simply a misconception?

Mr McCooe:

I can only speak for my company, but I totally disagree. We are in the business of lending. We want to be lending and bringing new business through the door. Clearly, we have to be prudent. That word has been used a few times, but such an approach must be taken with our risk model. I do not believe that the fee related to a mortgage has anything to do with whatever has happened in the past.

Mr Colville:

Does your question relate to banking charges or mortgage charges?

Mr Paisley Jnr:

It is about both but principally, with you chaps, it is about mortgage charges.

Mr Milligan:

When customers are facing times of difficulty, they are more acutely aware of the cost of charges. That might be where the perception comes from, because there has been no increase in our banking charges over the last 12 to 18 months. There is nothing to suggest —

Mr Paisley Jnr:

There has been no decrease either.

Mr Milligan:

The charges are pretty much consistent with where they were 12 to 18 months ago. Customers may be more acutely aware of those charges in difficult times. That may be where that perception comes from.

Mr Paisley Jnr:

At the risk of teaching my granny how to suck eggs, is there an incentive to reduce those charges? If your figures are reasonably stable, is there anything to be said for removing or significantly reducing those charges? Such a marketing tool might attract customers through the door and give them confidence to do the business and sign on the dotted line and reassure them that it is not going to cost them an arm and a leg?

Mr Milligan:

Without getting into an advertisement for Nationwide, we have tried to market on fairness, openness and trustworthiness. To return to a point that Jennifer made about building confidence, we are sponsoring a number of advisers to work with Citizens Advice so that we can build up a relationship with consumers and increase their confidence. We will continue to do that at a national and local level.

Mr Laing:

It is worth making a distinction between fees and charges. Fees are clear to the customer at the point of sale. They tend to be part of the way in which the product is priced. You could have a mortgage with a high fee and a low rate, or a mortgage with a low or no fee and a higher rate. That choice is clearly presented to the customer and they take whichever suits their situation.

Charges tend to be triggered by specific events. Again, they are set out on a tariff at the point of sale, but they have to be there to cover costs. We are regularly visited by the FSA, which requires us to demonstrate that the charges that we apply are matched to the costs incurred by an event. As others have said, our levels of fees and charges have not moved significantly over recent months and are certainly not there to bail out bad lending. We are happy to be in this business, which we have been in for a long time.

Mr Paisley Jnr:

What does your average customer pay in charges? Do you have an average charge?

Mr Laing:

The figure that I quoted earlier of the fee on our new mortgage is under £1,000 on most mortgages that are sold.

Mr Paisley Jnr:

Most mortgages?

Mr Laing:

Yes.

Mr McNarry:

My point follows the interesting trend of Mr Paisley’s questions. It would be useful for us to establish which of the companies in front of us are not bankrolled by the Government.

Mr Colville:

Nationwide is not. It has its own capital.

Mr Laing:

We are not.

Mr McCooe:

As part of Lloyd’s Banking Group, Halifax is part-owned by the Government.

Mr Paisley Jnr:

Is it 50% owned by the Government?

Mr McCooe:

The figure is 43%.

Mr McNarry:

Following that point — and it may be easier for Mr Colville, Mr Milligan and Mr Laing to answer — it would be helpful if you could tell the Committee what you think is the best time for Jim’s company and others in that position to get off that hook? The money market is crazy, and I accept your independence. I now understand some of your earlier answers much better: it comes back to what Ian Paisley Jnr said about perception. How do we get back to where we were and get people off the hook, so that, for example, I, as a borrower and saver, will no longer be a stakeholder and a taxpayer who pays for deferred bonuses? Those are the things that irk. How do think that we could go back, for the Committee’s sake? That issue is grinding in there.

Mr Colville:

I know that Jim is good at his job, and I know that his team in Northern Ireland is good at its job. It regularly competes with us, and it is good at what it does. What happened in Jim’s organisation happened well above him.

Mr McNarry:

How do you get off the hook in your company, Jim?

Mr McCooe:

Is the question about how we pay back the taxpayers’ money?

Mr McNarry:

How do you get back on to an even keel?

Mr McCooe:

We have a desire to do that. Everybody knows what happened — it is a matter of public record. Last week, we paid back £2·3 billion. We were the first bank to do so. We want to do that, and we will continue to do that. Two weeks ago, HM Treasury released £4 billion of preference shares. We bought those, and we paid back that part of the debt. We want to go back to being wholly owned by Lloyds Banking Group. I think that the Government also want that, so we are absolutely as one on that matter.

Mr McNarry:

How long do you think that that will take?

Mr McCooe:

I honestly do not know. It is an expressed desire of the business to do that, but I do not have a timeline for it.

The Chairperson:

Basically, the Government will release some of the shares if and when you express an interest in buying back some of its holding?

Mr McCooe:

Yes. I absolutely accept the point that we are part-owned by the taxpayer. We are keen to pay that money back as quickly as we can.

Mr Paisley Jnr:

In this jurisdiction, do you think that there is any sense that the Government should look at setting up a similar organisation to the National Asset Management Agency, which was set up in the Republic of Ireland? Do you think that that would be a viable or sensible way of addressing those issues?

Mr McCooe:

That is a good question. None of the main financial players here is based in Northern Ireland. Northern Bank is based in Denmark; Ulster Bank is part of RBS; First Trust is part of Allied Irish Bank and we are part of Lloyds Banking Group. Most institutions are UK-based. If one were to go down that route, one would aim at companies based in Northern Ireland, for example, the Progressive Building Society and groups like that.

It is an interesting point; I had not thought about that before.

Mr Hamilton:

I echo Ian’s welcome; it is good to have you here. It is important because the Committee wants to overcome all the problems, no matter who was responsible for them. We all want to get out of the current situation. It is important that public representatives and key players in the financial institutions try to work together and maintain an ongoing dialogue, whereby they can respond when we bring our concerns to them. We may not always agree, but at least a conversation between locally elected politicians in Northern Ireland and representatives of the financial institutions is now taking place; that did not always happen in the past.

I listened to the explanation of LIBOR and why interest rates are higher. Although I do not necessarily agree with increased rates being charged in some cases, I understand why your business is riskier than it was two years ago and, therefore, why you raised rates. There is a perception that you are not lending, and I accept your argument that you are, but I want to raise the issue of the initial cost to the borrower of borrowing money, which is, principally, the arrangement fee.

Ian Paisley Jnr talked about the perception that he picked up from anecdotal evidence from constituents, as we all have, that arrangement fees are now much higher than they were. The Committee has been presented with evidence on residential mortgage arrangement fees that the Consumer Council gathered from all the financial institutions in Northern Ireland.

You guys are the big players in residential mortgages in Northern Ireland and the UK, and you therefore dominate the market. The figures that were presented us compared your lowest and highest arrangement fees from January 2006 to December 2008. I appreciate that the data is slightly historical, but it is the most recent data available. I will allow you to respond, but the evidence presented to us is that the Abbey National’s lowest fee increased by 150%, while its highest increased by more than 300%; Nationwide’s lowest fee increased by 200%, and its highest increased by 400%; and Halifax’s lowest fee rose by 150%, and its highest rose by 33%.

If you compare those Consumer Council figures with those from the four main local banks, with which we have also had discussions, there is a difference. It is not a massive difference, but the banks charge lower fees. The perception is that the arrangement fee is simply what it says on the tin: the cost of arranging a mortgage. Why, therefore, has it increased by as much as 400%? What do you say in answer to the charge of profiteering? The perception is that you are profiteering; the fee is not an arrangement fee, and to call it such is contrary to trade descriptions. Some evidence has been presented to the Committee in support of that. As Jim said earlier, the fee is part of the overall mortgage deal. How do you respond to the accusations that we hear from our constituents?

Mr Colville:

At present, Nationwide’s lowest fee is £495 and its highest is £999, because it uses more wholesale markets. Nationwide, historically, did charge the highest fees. However, as Ian Laing said, we have had to engage with the wholesale markets, and those fees reflect that cost.

Mr Hamilton:

Do you accept that the cost of arrangement fees has increased significantly?

Mr Colville:

The cost has gone up, but that is the way in which mortgages are packaged now that we engage with the wholesale market.

Mr Hamilton:

It is a significant amount of money for the customer — the ordinary man and woman in the street; we are not talking about big businesses. The cost has gone up substantially, and people have to pay. It is not a one-off payment; it is paid over a 25-year mortgage. Most people rearrange their mortgages biennially. They will face having to pay another fee in two years’ time.

Mr Colville:

You can do it without the fee.

Mr Hamilton:

I know that, but there is a consequence on the interest rate.

Mr Paisley Jnr:

It is a case of “jam tomorrow”.

Mr Colville:

It can be done without a fee, but the rate is not as good. We would all like to return to retail deposits, but that is not the world that we are in at the minute. Mortgages are packaged. The Halifax might want to take a bigger slice of the market share, so that it will be more competitive and have funds sourced at a very competitive rate. The Halifax’s treasury department is racing the Nationwide’s treasury department. That is the reality.

Mr Laing:

On the subject of the range of fees, Abbey National’s lowest fee is nil and its highest is £1,495. There is a spread of fees in the market, and it is a choice that we offer customers. Obviously, the products with a nil fee tend to have higher interest rates. The cost of the mortgage, including the fee, whether it is paid upfront or capitalised into the mortgage, is disclosed clearly on the key fact illustrations that we are all required to provide in the same template and the same format, which is easy for the customer to see, and it is summarised into the total cost of the mortgage.

The price transparency in mortgages across the whole mix of interest rates and fees is extraordinarily clear, and that has been driven by regulations that the Financial Services Authority have imposed on the UK. It is a good regulation. It has meant that there are a variety of offers because we get a variety of demands from people. Some people do not want to know about a fee, which is why we offer a proposition with no fees, but some people do, and they want to lock in the lowest possible rate and the fees involved in getting that rate.

Mr Hamilton:

I am not arguing that things are not transparent or upfront. I appreciate that they are. However, my concern is the significant increase in fees. I appreciate that fees may have fallen since the figures from December 2008, but there was a significant rise, particularly last year. It is useful to raise the issue and to have those points explained. I do not think that the public understand the issue. If people are lucky enough to be offered a mortgage and have been told about the fee involved, it is very difficult for them to turn that offer down in the current climate. However, people do not understand why the fees have gone up — in some cases by several hundred per cent. It is useful to raise the matter just to have it explained.

Ms Purvis:

I want to return to the point about fees and charges. The written submission provided to the Committee states that lenders are closely regulated by the FSA who state:

“A firm must ensure that any regulated mortgage contract that it enters into does not impose, and cannot be used to impose, excessive charges upon a customer.”

You have heard what Ms McCann and Mr Hamilton said. It is difficult for us to look comparatively at fees, both arrangement fees and exit fees. We have talked about the data that has been provided. Would you be able to provide the Committee with some of that information, so that it could look at arrangement fees and exit fees to see what they were, and whether they have increased or stayed the same?

Mr Laing said that he was providing customers with a choice. Abbey National has offers with no fees but with higher rates, or mortgages with a fee and lower rates. It does not seem like much of a choice to me. It seems to be giving with one hand and taking away with the other. How do you work out that that is a choice? No matter how one looks at it, Abbey National is gaining, as opposed to the customer.

Mr Laing:

We are charging a fair market rate for the loan that we are offering, and we face an extremely competitive market to get to that fair market rate. However, presenting a customer with everything added in has the same cost to the customer. Some customers will choose something without a fee, while others will choose something that has a fee.

Ms Purvis:

Will you provide the Committee with comparative data?

Mr Laing:

We can provide data for example products.

Ms Purvis:

Will you provide examples that will enable us to compare products and fees that were charged two years ago with those that are charged now?

Mr Laing:

Yes.

Ms Purvis:

It comes back to the point that Ian Paisley Jnr emphasised. We have anecdotal evidence from constituents who tell us that fees have increased, but we would find it easier to advise them if we had the facts and figures in front of us and could say how much fees have increased for particular products. Did fees increase by 100% or 400%, or has the person been charged an arrangement fee, an exit fee or an overall cost fee? Such information would be helpful, so we would appreciate it if you would forward it to us.

Mr McCooe:

Yes. O ur customers say similar things to us in branches and on the telephone. Individual borrowers can feel isolated, so we must educate them to understand that fees are part of the overall product package. Perhaps we need to do more with respect to education and communication. Nevertheless, we will supply you with that information.

Ms Purvis:

We appreciate that. We discussed repossessions, and you submitted figures. I have been looking through that information, but I cannot find data for mortgage arrears in Northern Ireland. You provided details of the support mechanisms that particular lenders have put in place for customers who are in arrears, and that is appreciated, but it would be helpful to have figures for the number of borrowers in arrears. As Jay Colville said, the repossessions bubble is growing, so information about arrears and repossessions might give a sense of what is in front of us and of the support that might be required to help customers who are having difficulties.

Mr Colville:

Our figure for mortgages that are three months in arrears is 0·69% across all lenders, and the average figure for all UK lenders is 0·49%.

Ms Purvis:

Can you equate that figure to number of people in arrears?

Mr Colville:

I will provide that information in private. However, I am trying to put across the trend. Nationwide is experiencing more arrears, but it is using its charter to deal with them. The charter stipulates, for example, that before we repossess a property we are prepared to waive the early repayment charge. That is quite a commitment.

Ms Purvis:

Do you have any evidence of customers who are in mortgage arrears having their mortgages reclassified and further loans bundled together in an attempt to spread the debt over a longer term?

Mr Colville:

Customers sometimes take a payment holiday. However, that journey can be painful because people often fail to appreciate that the cost of a loan increases during such a holiday, due to the fact that repayment has been frozen for a year. Nevertheless, we are willing to do it.

The Chairperson:

Are those holidays a specified period of time?

Mr Colville:

Yes.

The Chairperson:

Is that for a year?

Mr Colville:

Three to 12 months.

Mr Laing:

By the time customers’ arrears reach a serious stage, they tend to be treated individually, and I expect that all the banks here will consider just about any deal that will work for both the bank and the customer. We are prepared to consider extending mortgage terms, and, as a temporary concession, we can move customers who are on capital and repayment mortgages to interest-only deals. We also undertake the sort of recapitalisation process that you described, whereby arrears are paid at the end of the mortgage’s term. All that is done with customers’ consent, and such measures are designed to find a solution that will see people through what is, hopefully, a time of temporary distress. Although arrears rates are increasing, we are finding that repossession rates are stable. Those rates are disconnected because we are taking a forbearing approach to customers who are in arrears.

Ms Purvis:

Mr Colville, your submission contains percentage figures for arrears performance. It says “3+MIA”; what does the acronym MIA stand for?

Mr Colville:

It stands for months in arrears.

The Chairperson:

I made a point about acronyms at the beginning of the meeting.

Ms Purvis:

I thought that it might refer to the number of mortgage owners who were missing in action. [Laughter.]

You said that Nationwide’s overall lending policies are identical to those in Northern Ireland. Northern Ireland has a higher proportion of self-build mortgages. Your recent decision, which has yet to be announced, to pull out of self-build mortgages will be felt here in particular. What will be the knock-on effect of that decision?

Mr Colville:

We will lend less in rural communities. The issue is one of credit risk; I have to respect my credit-risk director in London and convince him that Northern Ireland has the same safe characteristics as the rest of the UK. Nationwide does not currently have that view.

Ms Purvis:

Is that because it does not know the market here?

Mr Colville:

That is possible, but it knows that we have experienced an increase in arrears in our buy-to-let arm.

The Chairperson:

Are you pulling out of self-build mortgages across the UK, or only in the North?

Mr Colville:

We have not done it yet.

The Chairperson:

Assuming for the purpose of this question that you were fully consulted on the decision and that the decision was made across the UK, the disproportionate impact that it will have in the North appears to be an argument for a special case. Was that case made?

Mr Colville:

It was.

The Chairperson:

Everyone around this table recognises that that case must be made.

Mr Colville:

Yes, and I continue to make that case strongly, because I wish to do so.

The Chairperson:

You can see the efforts that we are making on PPS 21, PPS 18 and PPS 14. We are trying to put in place a manageable development system that will strike the right balance. Nationwide’s decision has hugely significant economic implications, unless the case is made for a regional-sensitive approach, given that that is a specific variation in the market here.

Mr Colville:

Nationwide is a prudent lender. Over the past decade, we have been the most stringent and prudent lender, and that is the nature of the organisation. If it is OK with the Committee, I will invite my boss here, and you can provide him with an education trip.

The Chairperson:

Presumably, you are looking for allies. From that, can we infer that you think that a case could be built?

Mr Colville:

Yes, I think that a case can be made.

Ms Purvis:

What percentage of your lending is to the buy-to-let market?

Mr Colville:

The overall percentage is small, but such lending took place during a significant period when prices rocketed. We pulled out of that market in 2008.

Mr McCooe:

Our percentage is small also.

Mr Laing:

Our current lending in the buy-to-let market is almost nil. Our total portfolio is between 1% and 2%.

Ms Purvis:

The submission from the Council of Mortgage Lenders shows a steep decline in loans to first-time buyers. Such loans are at their lowest point in the 34 years since the Council of Mortgage Lenders started to collect data. Do you have any evidence to suggest that that has to do with a maximum loan-to-value ratio or any limit on loan-to-income ratios?

Mr McCooe:

It is a combination of a number of factors. In my business, the maximum loan-to-value ratio is 90%. Previously, that was higher. There is a fear factor among first-time buyers about the property market. In the first quarter of 2009, up to 31 March, house prices here fell by 22%. That, in itself, is a worry, and it makes pricing and risk-modelling difficult at this time. The income multiple is less of an issue than it was during the peak of 2007, when house prices outstripped wage inflation. It is a combination of all those things.

Ms Purvis:

One argument that has been put forward is that less demand creates less supply and that there is conflict or tension between those two elements. However, demand can also be influenced by all the things that you have talked about.

Another factor that I have found from talking to people is a fear of being trapped in negative equity. For example, they are afraid that they might buy a property today for £150,000, and it will only be worth £100,000 next year, but they would be stuck with a mortgage for the original sum.

Mr Colville:

One of the things that happened was that first-time buyers were priced out of the market by investors. Indeed, the rise of house prices above £150,000 in 2007 was the death knell for first-time buyers. House prices have now returned to between £90,000 and £120,000, but they have only been in that range for the last four or five months. Therefore, it is too early to say what impact that reduction has had.

The Nationwide is lending more to first time buyers now, but those mortgages are being lent at an 85% loan-to-value rate, and there has been a consequential shock in relation to lifestyle adjustment.

Mr McCooe:

Almost one quarter of the Halifax’s first-time buyer borrowing is now done through shared-equity schemes, which we, of course, encourage. That is a changing demographic; it has not been at such a level before.

Ms Purvis:

How informed are customers about all of the schemes available. Jay, you said that you agree with those schemes in principle, but can more be done to make customers aware of the schemes that are available to them? As lenders, what are you doing to ensure that that information is made available?

Mr McCooe:

Yes, more can be done to make customers aware, particularly those customers who come directly to us. There are also customers that come to us through intermediaries that are regulated independently, but we communicate to those customers in writing to ensure that they are aware of all of the available schemes.

Mr Laing:

A wide variety of different shared-equity schemes are offered by different developers. However, sometimes different schemes are offered by the same developer, and Abbey National has discovered cases — more on mainland GB than here — where a dozen different schemes operate in the same building. There is a fair concern about the customer’s understanding of what is available to them and what participation in those schemes means to them. Those schemes are generally very complicated.

Abbey’s position on shared-equity schemes that are run by developers is one of caution. We are strong supporters of social housing and shared ownership, where there is a vulnerable group and a clear social and ethical agenda to support that group. However, we are much more concerned about shared-equity schemes that benefit customers who are struggling to afford the property, but which can also be a means for the developer to float the property at a price above its true bricks-and-mortar value. We operate a very cautious lending strategy in those cases.

Ms Purvis:

I have one final question, and perhaps you will all give your opinion on the issue. The events of the last 18 months have made lenders more risk-averse than before, and that has led to a change in lending practice with respect to maximum loan-to-value lending and a restriction being placed on buy-to-let mortgages. I do not know whether the securitisation of debt, and the flogging of that debt on the stock market will be banned, but do you think that such a climate will lead to the return of old-style banking, in which it will be the responsibility of a bank manager to approve mortgages and loans and ensure that debt is repaid?

Mr Colville:

My opinion is that the Turner Review will ban 100% mortgages, and we would welcome that. I do not know whether we will return to having local managers make every decision.

Ms Purvis:

Will it ban the selling of debt?

Mr Colville:

The selling of debt is a Treasury function; I do not know the ins and outs of it. I do not think that our organisation sold any debt packaged into a product in or outside the UK. It is not something that we would do.

Mr McCooe:

The packaging and selling of debt is not my area of expertise. A situation in which the local branch manager approves every mortgage will not happen. However, I understand your support for the principle of more traditional banking; I think that we will see more evidence of that in the future.

Mr Laing:

We are all major users of securitisation. Nationwide, HBOS and Abbey run some of the largest master trusts in the UK, which is where the other 30% of our funding comes from. It is unlikely that the FSA or anybody else will ban securitisation. It is very likely that controls will be imposed and that the contracts and structures of securitisations will be harmonised and become much simpler and easier to understand. However, if the UK needs to reach a position in which net lending equals net deposits and in which there is no wholesale funding, the current situation will become much more painful.

Very little new securitisation has been issued to external investors in the past two years. Any issuance has tended to be self-issuance and in place with the Government through schemes such as the special liquidity scheme; however, it is a relatively small flow. Life returning to that market will be one of the clearest signals that we have recovered some confidence and that the market is getting back on its feet. Moreover, lending criteria will not reach the same level that they were at before the start of the crisis. The 125% mortgages and self-certified mortgages exceeded sustainable strategies, and I expect the FSA to prevent a reoccurrence of those.

Securitisation is an important tool for us, and one of the country’s challenges is to create enough confidence whereby investors will invest in the UK again. At the moment, banks such as Standard Chartered, which operates mainly in Asia, continue to raise money from securitisation and, as a result, they continue to lend. The UK mortgage market has a bad name among investors at the moment. In many cases, that is not justified; however, a bad name means that funds are expensive and scarce, which, in turn, means that mortgages for customers, who are ordinary citizens of our country, are expensive and scarce. Increasing confidence in UK securitisation markets will help us escape the crisis.

Ms Purvis:

That scares the life out of me, because it suggests that a similar situation can reoccur. It suggests that, without strict regulation of securitisation, the boom and bust could happen again in international money markets. Although a return in confidence in the markets will inject money through lending, does that mean that we will face the same crisis all over again?

Mr Laing:

That has been a feature of mortgage finance for 20 years.

The Chairperson:

That has been the case internationally.

Mr Laing:

Yes, it has.

The Chairperson:

Therefore, it is a wider question. Thank you, gentlemen. It has been an interesting and helpful session, and we look forward to receiving the follow-up information as part of our work.

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