The Association of Mortgage Intermediaries (AMI) has warned there is too much money chasing too little return in the mortgage market.
The trade body highlighted that despite regulatory warnings, lenders were continuing to relax criteria while margins are also being squeezed, particularly at higher loan to value (LTV) and loan to income (LTI) levels.
In its quarterly economic bulletin, AMI noted that “margin compression is becoming a serious concern with too much money chasing too little return”.
It continued: “There is so little room for lenders to shave any more off price, that there is a notable move to differentiate on criteria.
“The Bank of England has been warning lenders about scaling up the risk curve for around nine months now, yet criteria appear to be relaxing.
“A number of challenger banks have opened their doors to those with previous debt issues while competition for high LTV market share has intensified,” it added.
Pouring cash in
As a result, AMI urged the market to appreciate the risks and uncertainties of the current situation and prepare for the possibility of an economic shock.
“Funders are pouring cash into a market they believe is safe, seemingly without taking account of the economic uncertainty facing the UK,” AMI said.
“It appears particularly obtuse to be chasing returns when the downside risks to our housing market are more significant than they have been in some time.”
The body noted that the market has been out of an economic environment where people were losing their jobs for so long that it has very little idea of how to manage the fallout from such an event.
Will begin to hurt fast
AMI also highlighted the issue surrounding the Support for Mortgage Interest loans, which have seen a fraction of the take-up predicted by government when it changed the previous regime.
The Office for Budget responsibility (OBR) now expects just 24,000 claimants to take-up the loan in 2018-19, compared to 98,000 expected originally, a shortfall of 76 per cent.
With low interest rates, a benign environment and regulator support for those in arrears, there has been little pressure around repossessions.
However, AMI noted that as the base rate rises, lenders will be placed under increasing pressure on arrears.
“While this is not an issue for the market at the moment, it would do well to prepare for a scenario that could arise, particularly in certain areas of the country where jobs may be lost due to Brexit,” it continued.
“Without addressing the lack of readiness, with any significant rise in unemployment coupled with less tolerance for long-term arrears, this will begin to hurt, and fast,” it added.