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 Others have withdrawn from new lending and are 'sitting on their hands'.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The most obvious consequences of this situation are a shortage of mortgage products, mortgage products being withdrawn at very short notice, mortgage products being re-priced upwards and generally more rigid lending criteria.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.

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