Mortgages, interest rates and when comparisons have limited value (22/156)

This is the latest in the series of daily blogs on financial regulation that I began posting on my first day of Covid wfh, 16 March 2020. I hope you enjoy and find useful...

It's been another important week for mortgage regulation, with the Bank of England's 0.75% increase in interest rates, to 3%, and its latest forecasts for the economy.

This was preceded by a TSC session that provided considerable insight into the state of the market and the pressures being experienced by both lenders and borrowers.

Despite what the FT described as the Bank's medium term "dovish outlook" on interest rates, the market, presumably waiting for the 17/11 Autumn Statement, still expects rates to peak at 4.72%, barely changed from before the announcement.

A major difficulty for regulators is that they haven't been here before and so there's no playbook. During the TSC, it was therefore fascinating to hear repeated comparisons to both the early 1990s and the 2007/10 financial crisis. The latter crisis has fewer similarities but there are some interesting parallels. The former is closer to the present situation, but what we all expect from regulation has grown enormously since. And, in any case, there is no real corporate memory of that time.

There were a lot of good arguments put forward at the TSC as to why the position is better than in the past - including more sophisticated regulation, a differently structured market (e.g. many more fixed rate mortgages), more and better forbearance tools, and a different attitude to repossessions from all concerned (including the courts).

However, the shadows of significantly higher unemployment and sharply falling house prices, although acknowledged, weren't really explored. And a figure from the FCA's Financial Lives Survey, mentioned near the session's end, has stayed with me - that 25% of mortgage holders had household income less than ￡30k. In present circumstances, this might not leave much room for manoeuvre.

I was also conscious all the way through the session of the potential for unintended outcomes, both from stressing layers of regulation that were put in place with a variety purposes, and from the well-intentioned actions of lenders and the authorities from here on.

And with a recession currently forecast to extend into 2024 and c.40% of fixed rate deals expiring by the end of 2023, when inflation is still expected to be above 5%, there's a lot of uncertainty baked in.

Nevertheless, both regulators and lenders seem relatively confident they have the bases covered. I hope they're right.

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