The “credit crunch” has ultimately resulted in a tightening of the RSL finance market, which has led several lenders to stop lending in this market or pull out of it completely. The few lenders that remain have taken advantage of the situation by increasing the margins that they are charging and by tightening up their loan terms and covenants.
Why is this important?
RSLs need private finance to carry out their business and to grow in the future. Many RSLs’ business plans require continuing additional private finance in order to stay solvent (a bit like the concept of a shark having to keep swimming in order to stay alive!) The restrictions on RSLs’ ability to borrow combined with less favourable loan terms could threaten the viability of some RSLs, or at least considerably reduce their ability to grow.
The credit crunch arose due to shocks running through the financial system, caused by financial institutions realising that they had bought instruments of dubious value because of the bundling of sub-prime mortgage products into other better quality mortgages. The net result has been a fear over the worth of mortgage based assets as security and this has spread through into the RSL market whose prime asset is their social housing. It also means that those sort of housing products such as shared ownership, equity share schemes, etc, are now much harder to develop because of the difficulty in obtaining mortgages either by the RSL itself, or by the purchaser. The collapse of Northern Rock and the exposure of the inadequacies of its business model in a financial downturn have only reinforced this. The result is that banks are looking very closely at their mortgage portfolios and have shown a marked reluctance to lend money in this market.
What are RSLs doing about this?
Despite the unfavourable commercial background RSLs are continuing to borrow, although the focus has switched from the mega refinancings seen in recent years, which were designed to take advantage of lower rates and better terms, to the obtaining of short/medium term finance to tide them over the current unfavourable economic climate (both the “credit crunch” and the emerging economic recession). There has been a continued appetite for loans and the remaining lenders who have stayed in this market have been able to capitalise on this. Just prior to the “credit crunch” there was a view in the market that the margins and terms of the loans to RSLs had swung too far in favour of borrowers, and this was one of the reasons why there were so few new lenders entering the market. In one respect therefore, the impact of the credit crunch can be regarded as having a “re-balancing” effect on the market. This is turn should encourage lenders to join/rejoin as things improve.
Following the impact of the credit crunch, some people thought that there would be a flight to the capital markets as a result of banks and building societies refusing to lend. However, it appears that the capital markets are even more concerned about the risks of investing in mortgage backed securities than the banks are and this does not seem to have occurred.
Implications for the future
It is likely to take some time for the effects of the credit crunch/economic recession to work through and for banks to be able to sort out their exposures. However, by that time, the value of RSL security should have reemerged and their 100% no default record will doubtless be a major factor in this.
Moreover, those proponents of the “cyclical theory” of economics will say that by that stage the economy should start growing again and therefore there will be an increased appetite for lending and borrowing. The key issue for RSLs in the current market is to secure sufficient finance to be able to trade through this period of economic uncertainty.
The key issue for the banks is to maintain relationships with their borrowers until their credit committees will allow them to lend again.